Monday, January 26, 2009

Types of Credit Cards

Almost everybody has credit cards these days. Some people feel more secure when they don’t carry cash or checks and credit cards are very convenient, especially when traveling.
Most credit cards are unsecured loans, meaning you are borrowing money from the card issuer to pay for purchases made without furnishing any collateral. Card issuers make a profit on the cards by charging fees and interest.

One popular type of credit card is the pre-paid card with a limit set by the amount of money deposited with the issuer. Many parents give their college students these cards or get them for themselves if they plan to travel and don’t want to take their usual credit cards with them. People with damaged credit can also use this type of card to rebuild their credit and prove their trustworthiness.

There are also credit cards backed by some collateral of the cardholder’s, which is called a “secured” credit card. This type of card is also used by people trying to rebuild their damaged credit or even by those who have no history and are trying to establish a financial identity. The credit limit is usually equal to the value of the collateral. Another type of card, the balance transfer credit card, is becoming a popular way to try to manage credit card debt. Low introductory rates attract clients that transfer their other credit cards’ balances to the new card, saving them large sums in interest, especially if they can pay off the entire balance before a high interest rate kicks in.

There are reward credit cards, too, offering cash back, points toward merchandise, airline miles and other incentives. Smart consumers are beginning to choose cards with no annual fees and attractive rewards; they pay their balance off each month and accrue no interest. Essentially, the credit card company is paying them to use the card!