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Types of credit cards

Types of credit cards

You can get a credit card for a wide range of uses, far beyond the basics of simply making purchases and paying for them later.

You can use credit cards to help pay off other debts using balance transfer or money transfer credit cards, or you can use them to collect rewards and even cashback. Some credit cards are designed for spending money abroad, and some are made for people who have a bad credit score.

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How to use a credit card

How you use your credit card will often depend on your circumstances, lifestyle and the type of credit card you have.

For example, if you have a balance transfer credit card (read ‘Balance transfer credit cards’ below), you shouldn’t use it for making purchases as the interest rate is usually quite high and will increase the transferred debt you are trying to pay off.

There are several types of credit cards out there, so it’s important to do your research and make comparisons. Ultimately, it mostly comes down to what you need it for, and if that credit card can benefit you without creating too much risk.

One of the best ways to use a credit card safely is to set up a Direct Debit to pay off the balance in full at the end of each month. This way, you avoid paying any interest. A credit card should be a helpful financial tool, rather than something you have to depend on to get you through to the end of each month.

Visa, MasterCard or American Express

Visa, MasterCard and American Express are all payment providers, or networks facilitating payments between banks and the shops, restaurants and other merchants you spend your money with.

Visa and MasterCard do not actually provide the credit cards. American Express is slightly different because they also issue their own credit cards as well as acting as the payment provider.

You may find that Visa and MasterCard are accepted virtually everywhere, but American Express is less common. This is because each payment provider makes their money by charging the merchant for the service of taking the credit card payment – and American Express generally charges merchants for this service at a higher rate than both Visa or MasterCard.

Merchants might be more reluctant to accept American Express, because it means paying out higher payment processing fees, but this is also why American Express credit cards generally tend to come with higher value perks such as travel rewards and cashback.

Balance transfer credit cards

Balance transfer credit cards allow you to transfer the debt from another credit card provider over to your new one.

In order to draw in customers, balance transfer credit cards offer you a 0% interest rate for a period of time, usually a minimum of three months to a year – but some of the leading deals give you 0% interest for two years or even more.

You will have to pay a balance transfer fee, which is a percentage of the debt you are transferring. Generally speaking, the longer the offer period, the higher the fee will be, but it is generally 1% to 4%.

It can still work out much cheaper than keeping your debt on the same credit card. For example, if you have a debt of £1,000 that you wish to transfer to an 18 month 0% deal with a 3% fee, then you will pay £30 upfront, and you could pay off the debt in full by only paying £55.50 each month. If your credit card debt had an APR of 18%, it would cost you £63.80 per month to pay it off in the same amount of time. With this example, you would save, in total (minus the balance transfer fee), £119.40.

You could save potentially more depending on the deal you get, and the rate of interest you are currently paying.

Balance transfer credit cards work like this:

  • When you apply for one, you are asked to provide details of the credit card you wish to transfer money from
  • Your new balance transfer credit card will have essentially paid off your old credit card, but you will now owe money to your new credit card provider
  • You will pay a percentage of the debt as a fee to your new balance transfer credit card provider
  • You can start paying off your balance at 0% for the length of the deal
  • Once the deal ends, the interest rate will go back to a relatively high rate of interest, so make sure you have a plan to pay off the debt in full within the offer period

0% purchase credit cards

With a 0% purchase credit card, you can make a purchase and pay off the debt over a longer period of time without paying any interest. Many of the leading deals give you 0% interest on purchases for up to a year, or even longer.

These credit cards are best utilised for big purchases at the start of the deal. That way you can pay it off over the entire period in instalments.

For example, if you pay for a travel season ticket for £5,000 and you have an 18 months 0% on purchases credit card, you can purchase your ticket in your first month, and pay it off in 18 monthly instalments of £277.80. That would, in most cases, be cheaper than a monthly ticket.

Just make sure you pay off the debt within the 0% offer period as you could get stung with high interest rates.

Cashback and reward credit cards

Some credit cards can give you rewards or cashback on purchases. They usually have a higher than usual interest rate, so they’re best if you can afford to pay back the balance in full at the end of each month.

Cashback credit cards give you a percentage of the money you’ve paid as cash into your account, which you can later withdraw or use to pay back your credit card balance. For example, if you have a credit card offering 0.5% cashback on all purchases, then if you make a purchase of £1,000 you will get £5 back.

You can get a whole range of other rewards with various credit cards, including airline rewards, where you collect points to spend on flights and travel with every purchase you make.

Some supermarkets and big-name brands have their own rewards credit cards that double up as customer loyalty cards allowing you to collect points to use in their store based on purchases you make anywhere.

Finding the right reward or cashback credit card for you will depend on your lifestyle and spending habits, especially as many of the leading cards come with bonuses for spending with particular brands and special introductory offers.

Travel abroad credit cards

When travelling abroad, finding a convenient way to spend money can be tricky. With travel abroad credit cards you can make purchases without having to pay any foreign transaction fees that are standard on all other credit cards.

With a standard credit card, you would have to pay a small percentage of the purchase as a fee — foreign transaction fee — each time you used it abroad. The same applies to debit cards as well.

Travel abroad credit cards use the payment issuer’s exchange rate (MasterCard or Visa exchange rate) to figure out the price, and won’t add anything extra to it. These exchange rates are often advertised as ‘perfect’ on travel abroad credit cards, and they are competitive, but they are not exactly the same as what the immediate currency market shows. Nonetheless, it does often work out to be comparable in price to cash, and at least safer and more convenient.

Money transfer credit cards

Money transfer credit cards allow you to transfer cash into your current account, allowing you to pay off any kind of debts, but they are typically used to pay off expensive overdrafts.

Similarly to a 0% balance transfer credit card, money transfer credit cards come with extra long 0% interest offer periods, allowing you to repay the debt at 0% over a period of around a year or even two years (sometimes even longer).

You will be charged a fee of around 4% of the amount you wish to transfer to your account but this can vary depending on each provider. So for example, if you wanted to transfer £2,000 into your account, it would typically cost you £80. It can still be much cheaper than paying off a £2,000 debt on a loan or overdraft.

Credit building and “bad credit” credit cards

If you have poor credit, you might still be able to get a credit building or “bad credit” credit card. These credit cards are aimed at those with a less than perfect credit history and can help customers improve their credit score.

Each time you make a debt repayment it shows up on your credit report, contributing to a positive score. Credit building credit cards encourage making debt repayments in full and on time because they have low credit limits and high interest rates, therefore heavily discouraging large amounts of borrowing.

Dual, best-of-both or combo cards

Many leading balance transfer credit cards also offer 0% deals on purchases in a dual or combo credit card. You can use the same credit card to make purchases at 0%, even while you pay off the balance you have transferred from another credit card at 0%.

You should generally avoid using the same credit card for purchases and balance transfers, even if there are separate 0% offer periods. That’s because if your primary purpose is to pay off an existing debt using a balance transfer, it would make no sense to keep adding to it by continuing to make purchases. You would only make clearing your debt harder.

Different types of credit cards

There are credit cards to suit all needs, from cards for those with billions in the bank to cards for people who need to fix up their credit score.

  • Purchase cards – Designed for buying things with, many offer 0% interest introductory periods.
  • Balance transfer cards – These cards can hold the balance from other cards and give you a break from paying interest.
  • Money transfer cards – Designed to give a cash loan, typically used to pay off overdrafts or other loans.
  • Credit-builder cards – Cards aimed at those with poor credit scores to rebuild their credit.
  • Credit cards for bad credit – If you have poor credit these cards enable you to borrow money for a higher price.
  • Low APR cardsThe cheapest cards for long term use and sustained borrowing.
  • Travel credit cards – Credit cards with low or no foreign transaction fees and frequent flyers rewards.
  • Reward cards – Credit cards help you earn loyalty points for merchandise, travel and discounts as you spend.
  • Cashback cards – Cards that give you a percentage of the amount of money you spend back as cash.

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