Credit Card Types

Credit cards have evolved from their early days into flexible financial tools for most types of spenders – and savers.

Simply Credit

The basic function of a credit card is just that – credit. By making purchases on the card, the credit card company loans the user the monies and repayments are made at an agreed rate of interest. Some cards offer an interest-free period of up to 56 days after purchase, others charge interest from the day of purchase.

Cash back Cards

Some cards offer cash back against spending, such as the American Express Platinum or Blue credit cards. The % of spend refunded varies according to how much is spent, and starts at 0.5%. Such cards often require a minimum spend each month and a certain salary level. Cash does not mean actual money in hand, but usually the amount deducted from the next month’s purchases. Remember that cash back credit cards are only worthwhile if the entire balance is paid off every month (read our article on Credit Card Charges). Otherwise, the interest charged wipes out the value of any cash back gained.

Rewarding Credit

Reward cards usually offer points towards purchases from a set catalogue or set of stores, such as Nectar points, or the Air Miles scheme. Some cards are geared towards a particular final purchase, such as the GM card where points can earn a maximum £2,000 discount on a new GM car. Remember that reward credit cards are only worthwhile if the entire balance is paid off every month. Otherwise, the interest charged wipes out the value of any rewards gained.

Charitable cash

By taking a card linked to a charity, every time the card is used, the charity benefits. For example, the Cancer Research UK credit card from Halifax donates £20 for each new customer and the charity receives 0.25% of every subsequent £100 spent. Cards such as the Barclaycard Charity card spread the benefits by donating £5 for each new customers and 0.3% of that customer’s spend to four different charities.

Fine Balancing Act

Balance transfers enable card holders to transfer debts from one card to another to take advantage of a better rate of interest repayments. There are various catches, however, which may include;

balance transfers fees of up to 3% of total transfers
transfers not allowed between cards from the same banking group, eg MBNA credit cards
repayments made against balances transfers rather than payments, incurring more interest charges
Quick Balance Transfer Guide

Balance transfers are best used where the new card holder takes advantage of a 0% interest time period and pays off the balance during this time. Smart users never make purchases on their balance transfer cards because of the repayments issue.

Shop until you drop

Store cards look a great idea, where signing on the dotted line (at the counter) can net a discount of 10% or more. However, store cards often charge very high rates of interest, so unless the balance is paid off within the first month, that interest rate of up to 30% will wipe out any discount gained at the tills. The top tip is to use a store card for a major purchase or a very large shopping trip such as fitting out a house or Christmas presents. Then, pay the balance off in full, and keep the card account only for any priority mailings or future sales previews.

Prepaid Credit Cards

Prepaid cards have emerged from concerns over both credit card debt and internet fraud. Prepaid cards such as the Cashplus prepaid Mastercard allow users to ‘charge’ their cards with a certain amount to spend, and once this is spent, to top this up either from a bank account or in person. There is no credit facility, so users can never spend more than they actually have on the card.

The Colour of Plastic

Many companies offer Silver, Gold or Platinum (or similar named levels) for their cards. Snob value aside, these levels usually reflect the salary of the holder, their good credit rating, the level of additional benefits such as purchase protection, and the credit limit available. In practice, these types of cards are somewhat dated, as many of the benefits such as low interest rates, are available elsewhere. Users can now choose their own designs for their cards, or even create their own images. Some credit card companies have experimented with unusual shapes or cut-outs in their cards, but users have reported that these fancy designs can cause major confusion when using the card abroad.