Each year more and more payments are made electronically, and while debit card use is growing faster than credit card use, it is almost impossible to do the things you want without having at least one credit card.  It’s important to use credit cards responsibly, and if you are not in a position to be able to do so, you should avoid having any, but you should also realize that you limit yourself in building a strong credit profile, and getting other types of loans, if you don’t have at least one credit card that you use at least occasionally.

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 Types of Credit Cards

There are several types of credit cards, in terms of how they work and the things you need to know.  There are literally thousands of different credit cards offered, but they should all be able to be categorized in one of these three types:

  1. Unsecured Credit Card – the standard credit card type
  2. Secured Credit Card – credit card where a security deposit is required
  3. Charge Card – used like a credit card but technically there is no line of credit issued

Unsecured Credit Cards

The unsecured credit card is the most typical kind, and what people generally think of as a “credit card”.  The bank that issues the card approves the user for a certain credit line, and the user may need to pay an annual fee (more on that later), but doesn’t need to put up any kind of security deposit.  The amount due each month is the greater of a percent of the balance or a minimum (usually $10 or $25), and the user just needs to pay that minimum to stay “current” on the account.  Interest accrues on any unpaid balance following the payment due date.  Once you run a maintain a balance all new purchases will also have interest begin to accrue immediately.  Part of the reason there are so many different unsecured credit cards is because of the ability to earn points or other benefits, good for different things, based on usage.

Secured Credit Cards

A secured credit card is generally for people that haven’t established any credit yet, or have a poor credit profile, and this type of card can help a person build or rebuild a stronger credit profile.  This type of card requires the user to put down a security deposit – sometimes equal to the entire size of credit line offered (i.e. a $300 security deposit to get a $300 credit line), or other times is a substantial portion of the credit line offered (i.e. a $300 security deposit to get a $500 credit line).  Similar to a unsecured credit card, the user can pay the full balance by the payment due date, or just a part, as long as it’s at least the minimum, and interest would accrue on any unpaid balance.  However, the user generally doesn’t earn any interest on the security deposit provided to the issuing bank, unless state law requires the bank to pay it, but even if there is interest earned, it will be at a substantially lower rate than the bank charges on unpaid balances carried month to month.  Like an unsecured credit card, the issuing bank may charge an annual fee, and also may offer points or other benefits for usage.

To be clear, this is an appropriate card type only for users that don’t qualify for an unsecured credit card but are actively working to build or rebuild a stronger credit profile, or otherwise have limited access to banks or credit unions.  The requirement to put down a security deposit and then also pay again for purchases charged to the card, as well as potential fees and interest charges only makes sense in two cases:

  1. The user doesn’t have sufficient money to have in a bank account that won’t also result in substantial monthly fees, and therefore cannot have a debit card.
  2. Activity on debit cards does not get reported to the credit bureaus, but activity on a secured credit card does.  So a user that uses the secured credit card responsibly, pays the balance each month on time and does this for several months will earn a higher credit score and also begin to meet the requirements of banks that issue unsecured credit cards.

 

Charge Cards

A charge card is used just like a credit card, however the biggest difference is that the user shouldn’t amass more charges on the charge card than he/she has funds to pay within 30 days.  Charge cards don’t have a long term line of credit – they are meant specifically for being used as a method of payment that is safer and more convenient for both the user and the merchant than cash or checks.  However, unlike a credit card where the user is still “current” if they make the minimum payment and then carry the remainder as a balance to the following month, the user must pay the charge card balance in full by the payment due date each month.  Many charge cards don’t have a specific line of credit, because again, they aren’t credit cards. However, in terms of credit reporting the card issuer will report to the credit bureaus whether the cardholder has paid on time or is delinquent, and also will report a credit limit that the credit bureaus use as part of their scoring algorithms.  Therefore, responsible use of a charge card can help a user build and maintain an excellent credit profile as well as responsible use of any other credit card.