Overview
Learning about credit cards can be overwhelming, especially in this day and age where there seems to be an endless supply of information trying to pull your attention from all directions. We began our credit card journey 4–5 years ago, shuffling through tons of information online and making beginner mistakes before finally becoming familiar with the credit card game. We want to provide you with a comprehensive guide that can fast-track your credit card journey.
In this 3-part series of Credit Card 101, we’ll break down all the essential information you need, starting from Understanding the Basics of Credit Cards. From there, you’ll learn the basics of Choosing the Right Cards to Maximize Reward Points. To conclude, we will go over how to Navigating Credit Card Portal & Building Smart Habits. This series will focus on credit cards that earn reward points and miles, serving as a general guide rather than concentrating on specific cards or benefits. Rest assured, we will provide you with relevant links for further learning. With that in mind, let’s dive into Part 1 of Credit Card 101: The Basics of Credit Cards.
Types of Credit Cards
Credit cards come in a variety of types and styles, each designed to meet specific financial needs and preferences. If we have to put a number on how many types of credit cards exist in the market, there are roughly around 10 types, each with different issuing banks or brands. This should give you an idea of roughly the number of cards that are available in the market. But to make things simple, these are the only 5 categories1 you need to know for now:
- Cash back Card
- Reward Points Card
- Travel Card
- Credit-Building Card
- Other Cards
Cash back Credit Cards: A cash back credit card allows you to earn a percentage of your total purchase credited back to your account. This percentage can vary based on the card and the type of purchase. Some cards offer a flat rate on purchases, while others offer different rates depending on the type of purchases (ex: restaurant, grocery, gas, travel…). You can typically redeem the accumulated cash back in various ways, such as statement credits, direct deposits to your bank account, checks, or gift cards. For example, the Bank of America Customized Cash Reward Card is a cash back credit card.
Reward Points Credit Cards: Unlike cash back credit cards, a reward points credit card allows you to earn points for every purchase. The amount of points you earn can also vary depending on the card and the type of purchase. You can typically redeem the points you earn through the card issuer’s rewards portal, which offers a wider range of redemption options compared to cash back. Ranging from what the cash back cards already offer to the option of transferring points to travel partners, such as airlines and hotel chains, often at favorable rates for travel enthusiasts. An example of a reward points credit card is the Chase Freedom Unlimited.
Travel Credit Cards: Similar to reward points credit cards, a travel credit card allows you to earn points or miles for every purchase you make with the card. Usually, it offers higher rewards for travel-related purchases such as airfare, hotels, and dining. To make it more specific, there are 2 main types of travel credit cards: General Travel Credit Cards and Co-branded Airline or Hotel Credit Cards. A general travel credit card offers similar points redemption options as a rewards points credit card, while a co-branded airline or hotel credit card typically limits redemption options to the specific airline or hotel brand. An example of a travel credit card is the American Express Platinum.
Credit-Building Cards: These cards help individuals establish or rebuild their credit history, making them useful for those with no credit history or poor credit scores. For example, if you’re a college student with no prior credit history, get a secured credit card (often referred to as a student or starter credit card) to start building credit. An example of a credit-building card is the Discover it student card.
Other Cards: To keep things simple and easy to follow, we’ll list out a couple of different credit cards that you might have heard of such as business credit cards, corporate credit cards, 0% APR credit cards, and store credit cards. Here’s an article detailing these cards if you’re interested in learning more about them.
Benefits of Having a Credit Card
Credit cards offer numerous advantages, the most appealing of which is earning a percentage back on every purchase. But before we break down some of the other key benefits, one of the most fundamental reasons for having credit cards is to build and improve your credit history. A good credit score goes a long way since it allows you to get better loan and mortgage terms and a higher approval rate for rental applications.
Sign-Up Bonuses: Aside from the main benefit of earning cash back and points, another enticing reason for getting credit cards is the sign-up bonuses. An attractive sign-up bonus can offer significant rewards (cash back, points, miles, free hotel stays…) shortly after you open the card and meet the minimum spending requirements. The sign-up bonuses usually come in the form of “spend $X amount in Y months and get Z points or Z free hotel nights”.
Card-Specific Benefits: This is where different types of credit cards start to get creative. The sky’s the limit when it comes to the added features different cards provide, such as statement credits to major brands (UberEats, hotels, Disney+, ShakeShack, Grubhub), consumer protection (purchase protection, extended warranties), travel benefits (travel insurance, airport lounge access, no foreign transaction fee), and even concierge services.
Ongoing Reward Offers: A lot of credit card companies (Chase, American Express, Citi, CapitalOne, etc) partner with merchants to offer great cash back deals for cardholders. Some notable brands include Lululemon, Lyft, Chevron, Brooklinen, and Uniqlo. This is another layer of added benefits for frequent shoppers of those brands. To activate the benefits you will need to manually add those “coupons”.
Cost of Carrying a Credit Card
At this point, you might be wondering whether such an array of benefits could be offered without cost. You’re absolutely right— they do not! One of the least talked about and often the biggest cost of credit cards is the potential for increased spending. With freely available credit, credit cards can make it easy to overspend, leading to potential Interest Payment and Late Payment Fees.
“According to the latest consumer debt data from the Federal Reserve Bank of New York, Americans’ total credit card balance is $1.115 trillion!”
You will be charged interest if you do not pay your full statement balance by the due date. A Late Payment Fee will be incurred if you do not make at least the minimum payment by the due date.
Annual Fee: This is a fixed cost charged by the credit card issuers billed once a year for the privilege of using their cards. The purpose of the annual fee is to help cover the cost of the benefits and rewards that the card offers. Later on in this credit 101 series, we will go more in-depth on how to evaluate annual fee credit cards.
Foreign Transaction Fee: This is a surcharge applied to transactions that occur outside of the cardholder’s home country or are processed through a foreign bank. The foreign transaction fee will apply on any purchase made in a foreign currency, online transaction purchased from foreign-based merchants, and travel expenses incurred while traveling abroad. Usually, this isn’t a big deal, since many credit cards have the “no foreign transaction fees” feature.
Hopefully, by now, you have gained a better understanding of the different types of credit cards that exist in the market, as well as the benefits and costs of a credit card. To start on choosing the right card(s), stay tuned for the next part of the series, where we’ll dive into the topic of Choosing the Right Cards & Maximize Reward Points.
- note that these categories are not mutually exclusive: An Amex Platinum card can be both a reward points card and a travel card ↩︎