There seem to be so many different types of credit cards now that it’s getting confusing.
It used to be that you just got a credit card, used it, paid your bill and that was that.
Now we have 0% balance transfer cards, 0% on payments cards, prepaid cards, reward cards, credit-builder cards and more.
Here’s a breakdown of the different credit cards you can get now, to cut the jargon!
- What are low rate cards?
- What are reward cards?
- What are 0% on purchase cards?
- What are 0% balance transfer cards?
- What are credit builder cards?
- What are secured cards?
- What are prepaid cards?
These pretty much do what they say on the tin – they have low interest rates (usually single figures) and they’re good for people who know they won’t pay the full amount off each month and really need a low charge on the money they’ve borrowed. They’re ideal for people looking to make a large purchase in the near future that will be paid off relatively quickly.
Reward cards – surprisingly enough – reward you for using them. That’s nice of them!
If you’re the sort of person who pays off their credit card bill on time every month, then it makes sense to get something back from your spending.
You could earn points to use in a shop like you can with the John Lewis card or the M&S card or you could earn Avios as you can with the Lloyds Duo card (Mastercard and Amex) or you could get cashback as you can with some American Express and Capital One cards.
These are very helpful if you’re about to make a big purchase like a new kitchen or a sofa or a car. With a 0% on purchases card, you pay for the item but you don’t get charged any interest for a few months. It used to be just six months of 0% but now it can go on for over a year.
That means you effectively get a free loan for a while. You have to pay something back each month during the 0% period but you pay no interest until the 0% time runs out. At that stage you could switch what’s left to the next type of credit card – the 0% on balance transfer card.
With these cards you can transfer the amount of money you owe on one or more credit cards that are charging you interest onto a new card that charges you no interest for a few months. In fact, some of them charge you no interest for two or three years! It’s a great deal if you can get it.
The only drawback is that you have to pay a transfer fee (which is added on to your debt) so it does cost you a bit, but, for large amounts, it can really be worth switching to the 0% deal anyway. In the long-run you save a lot. Just make sure you know when the 0% deal runs out as you will then be charged interest each month as well as the amount you have to put in to gradually pay off the loan itself.
If you have had problems with debts, or you’ve had a County Court Judgement (CCJ) against you, or perhaps you were financially connected to someone with dodgy credit, you’re likely to need to clean up your credit record in order to get cheaper loans and mortgages.
Credit builder cards can help with this, as you can see in this article. They’re often more expensive but if you pay your debt off in full each month before the interest period kicks in then that makes no difference anyway. It’s still free borrowing up to that point.
Just keep using the card and paying off in full each month and after six-twelve months your credit rating will be much healthier-looking!
These are relatively new in the credit card market. Again, they’re for people who don’t have perfect credit scores and, maybe, struggle to get a credit card.
What happens is that you put a cash deposit down as security on your borrowings but you get it back when you close your account. The cash deposit could be put there by someone else so if you’re living at home, for example, you could potentially get a parent to put the deposit down for you to have the credit card. The secured deposit is there just to take away the risk to the credit card company in case you default on any repayment
These work a bit like pay-as-you-go mobile phones.
With a prepaid card, they look like credit cards and you can use them like credit cards,, but there’s no actual ‘credit’.
You put money onto the card before you use it and you can only spend the money that you have put in. You can top up the amount any time and keep it going like that but you can’t borrow on it.
Prepaid cards can be very useful when you go abroad. Some cards will let you load them up with euros, dollars or other foreign currencies.
There are generally charges for using these cards in some way – either for topping them up, taking cash out or when you spend. Take a look at what we say about prepaid cards here.
HSBC has created a handy infographic that goes through all the main credit card types, showing you what they all do. Take a look below: