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The Pros and Cons of the Four Types of Credit Cards

Published
by
staff.writer
on April 16, 2008
in Credit Tips
. 0 Comments

Before you apply for your first credit card or your next one, you should know the pros and cons of each type of credit card. There’s a reason why credit cards are categorized into different types, because they give different features and each one have different advantages and disadvantages.

The four basic types of credit cards you should know about are the zero- or low-interest, rewards, secured, and the student credit cards. Below are the basic pros and cons of each of the types.

Zero Interest, Low Interest and Balance Transfer Cards

The zero or low-interest cards, give you the ability to pay very little or no interest for a period of time. These cards do have time limits on them and other conditions to protect the credit card company. Sometimes the low rate applies to balances transferred from another credit card. These are called Balance Transfer Cards.

Pros of a Zero Balance Card
The advantage of the zero-interest type of credit card is, of course, credit card companies are lending you their money for zero interest. You don’t have to worry about finance charges ballooning your balance since the card doesn’t charge an interest. If they do charge an interest, they charge only very minimal rate.

Cons of a Zero Balance Card
The disadvantage is that the zero or a low-interest rate only lasts for a limited period of time, usually less than a year. After that the company will charge you their regular rate. They only offer zero or low-interest rate card for an introductory period.

You should choose a Balance Transfer card only if you seriously intend to pay down your credit card balances. Click here to see the Top Rated Balance Transfer Cards.

Rewards Credit Cards

The next type of credit card is the rewards credit card. The name says it all about this type of credit card because it gives rewards to the owners if they frequently use the card to pay for their expenses or even for every purchase made using the card. This type is best for people who use credit cards in almost all their expenses and have no problem meeting their monthly credit card bill.

Pros of a Rewards Credit Card
The bottom line advantage of this credit card is that you get money back for every purchase you make in this card. Some cards give points depending on the amount of purchases you make. You can redeem the accumulated points later in exchange for cash, goods, or even credit card balance. Other rewards credit cards gives discount for every purchase. Frequent flyers can also get free mileage from their reward credit cards.

Cons of a Rewards Credit Card
The disadvantage of this type of credit card is that it often has unreasonably high annual fees. It often has huge interest rate also. Credit card companies that offer rewards credit cards give low interest rate at first but dramatically increase it after the introductory period. Make sure you ask your company whether the rate is variable or not. The rewards offered in this type of card, too, are limited. They are limited in terms of the period of redemption and the method of redemption. Be sure you read the fine print before you apply for the card.

Choose this type of credit card if you consistently use your card for purchases (such as business expenses) and pay your balances down consistently. Click Here to see the Top Rated Rewards Credit Cards.

Secured Credit Card

Another type of credit card fit for people who want to establish credit for the first time or those who want to reestablish lost credit worthiness is the secured credit card type. You can get this card by depositing some amount to the issuer of the card, which is usually a bank. Base on this amount, you’ll be given your credit limit.

Pros of a Secured Credit Card
The main advantage of this card is that it’s available to those who have no credit rating to begin with or those who have lost it due to nonpayment. This type of credit card is tracked by business bureaus that establish your credit rating. In other words, if you want to repair a damage credit rating, then this card is for you.

Cons of a Secured Credit Card
The disadvantage of this type of credit card is that is has a high interest rate compared to the other types. In addition to the interest, this card also has high annual fees. Be aware also that you could incur balance higher than your initial deposit because your initial deposit only serves to offset whatever balance you have left in case your account is closed.

You should choose a secured card if you are ready to rebuild your credit history. Click here to see the Top rated Secured Credit Cards.

Student Credit Cards

The last type of credit card is designed for college and even high school students if they can get their parents to co-sign the application. Credit card companies realized that students were an untapped customers, and began offering credit cards to students with little or no experience managing credit.

Pros of Student Credit Cards
For a responsible student, a student credit card could give them numerous benefits. You can use your student credit card to establish your credit score since this is usually the first credit card you will own.

Pros of Student Credit Cards
The major advantage of student credit card is that you are given a means to obtain financial help in times when they need it most. A student credit card comes in handy in emergency situations, or when activity comes up that needs money in short notice. Because your parents co-sign and therefore supervise your spending, student cards can give you an opportunity to learn how to handle credit and financial responsible with a solid safety net backing you up.

Cons of Student Credit Cards
But since the person handling the card is relatively new to this source of money, some find this opportunity overwhelming and may not handle the situation well. This is the major cause of disadvantage for this type of card. College can be a stressful enough time as it is, and the financial consequences of mismanaging credit can often make things worse.

You should choose a student credit card if and only if you are ready for the financial benefits, and responsibilities, that come with it. Click here to see the Top rated student credit cards.

At the end of the day, you should remember that credit cards are not the same and the terms and conditions of the issuers are not the same, too. The original purpose of a credit card is to aid in the convenience of using money. Knowing the differences between each type of credit card, and their corresponding pros and cons can make all the difference.

Establishing Good Credit? Possible!

Published
by
staff.writer
on March 5, 2008
in Credit Tips
. 0 Comments

Are you loosing sleep over bad credit, unpaid credit bills or damaged credit? Establishing good credit is not as hard as most people think. Most of the time the solution is to follow five very basic rules or tips to follow:

Start small by applying for gas credit cards or department store credit cards which are easier to qualify for
Pay on time, Every time,
Stay within sensible credit limits,
Pay at least the minimum payment, and
Make sure that you are covered in all your purchases

Sound pretty easy, right? Some people may actually shrug their shoulders and say that this will not fix their financial situation. Understanding your credit history, credit line and the effects of your FICO scores will change your outlook on establishing good credit. With the right information, you can do it.

Understanding FICO

FICO is an acronym for Fair Isaac Corporation. This is a publicly traded company that has studied and created the most well known and widely used credit scoring model in the United States. Your FICO score can be your best friend, or your worst enemy, when it comes to establishing good credit. Your FICO score does matter. According to a statistical survey conducted in the United States, a score of 680 or higher dictates that the individual has established good credit.

The FICO score is used by banks and companies to asses an individual’s credit worthiness. For a broad overview of how the credit is scored, here is the approximate percentage for scoring. 35% is allotted for punctuality of payments with regard to past bills, 30%, for the amount of debt the person is in, 15% for the credit history of the person, 10% is for the type of credit used and 10% for the most recent amount of credit accumulated by the individual. Having a great FICO score will give you a better stand on your finances.

Two types of credit.

Your Credit Score is used for a number of things, including determining how likely you are to repay a loan or line of credit. The two main types of credit are revolving credit and installment credit. With revolving credit, you can pay the amount you owe down, or allow it to increase, such as a credit card. There may be a maximum balance, but there is no fixed starting balance. With installment credit, there is a single fixed initial amount, and the idea is to pay this amount down over time, eventually arriving at a zero balance. An example of installment credit is a car loan or house loan. Both types of credit affect your FICO score. For instance, if you have numerous credit cards and you’re late in payments in only one card, your FICO will go down regardless. This is bad because the rest of your credit card companies have the right to raise your interest just because your FICO decreases because you’re late in payment on one card. The typical number of cards you can have is three, beyond this number can be categorized as numerous. Your installment credit too affects your FICO score. If you’re having trouble meeting your car loan or your house loan payments, your FICO score will be reduced.

There are a few simple steps in establishing good credit.

*First, try not to hit your credit limit. When individuals use 60% or more of the available credit, this signals lenders that the individual might overextend. Using a minimal amount on your credit limit will give you a higher FICO score.

*Second, limit your credit report inquiries. Since each inquiry will appear on your credit record, lenders will be able to look into the number of times you have applied for credit. Having too many inquiries on your record is not a good thing.

*Third, try not to miss payments. If possible automate as many payments as you can. Delayed payments on credit bills will push down your credit standing. And remember, even though meeting your minimum payment is good, it’s even better if you can pay more than the minimum. Having the lowest possible monthly balance is a signal that you can indeed meet your obligations.

*Fourth, maintain long-standing accounts but close any accounts that are not being used. Companies are less likely to lend money to a financial ‘rookie,’ so the longer your credit history, the better your FICO score will be. If you happen to have a credit card that has been with you for so long and your credit standing on that card is good, keep it maintained. Having other unused credit cards will merely tempt you to go on an unneeded shopping spree. Closing these accounts will also prevent identity theft.

*Lastly, remember that all credit cards are different and should be handled differently. Picking a credit card that will fit your income and lifestyle will save you the trouble of long standing debt in the future.

Already Deep in Debt?

For those that are already in deep debt, you can still establish good credit. The most efficient tip would be for you to pay off standing bills. You don’t have to win the lottery to pay it all off. You can start small and then build your way into making a relevant dent on your debt. A little bit more discipline may be needed on your spending prowess, but the final outcome is worth it.

Individuals who do not have credit cards or have no credit history are not in good light with credit companies either. Having no credit history will affect you too. This is with regard to decisions about premiums or insurances even future jobs and apartments.

Moreover, having a credit card does not mean that you will fall into debt forever. When you have learned how to spend on a budget while keeping your income in mind, a credit card will be your best friend. The best starting point would be to start a credit history/line with a secured credit card. These secured credit card companies require a down payment before starting the account. This merely insures the company of your capabilities to pay your bills. The down payment entered will measure the credit limit of the card.

The bottom line is that establishing and maintaining good credit will benefit you from all angles. It is not an impossible dream to establish good credit. Simply understanding where you are financially and placing a budget on your expenditures and sticking to it will surely increase your credit standing.