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.
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:
- Unsecured Credit Card – the standard credit card type
- Secured Credit Card – credit card where a security deposit is required
- 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.
- 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.
- 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.