Different types of credit cards explained

Choosing which credit card to go for can be a confusing and sometimes daunting experience, especially if you’ve never had one before. In this article, we’ll be looking at what different types of credit cards are typically available and which credit card (if any) may suit your needs.

About credit cards

What is a credit card?

A credit card is a card supplied by a bank or credit card provider, with a set amount of credit which you can spend anywhere, anytime. This is known as your ‘credit limit’. Any credit that you spend will have to be paid back and you may be charged interest depending on when you choose to pay. You can choose how to repay this amount – either by making minimum monthly repayments, a value of your choosing each month, or by paying the balance off in one instalment.

To get a credit card, you have to apply for one. You’ll undergo suitability checks, such as credit checks, and if your application is successful, you’ll receive your credit card in the post, along with a letter detailing your credit limit and the applied interest rates.

‘Credit’ refers to the money that you spend when using your credit card. This isn’t taken from your current account but is money that you borrow with the intention of paying back at a later date, with the added flexibility of choosing how to repay this amount.

You’d be expected to pay back a minimum amount each month of any outstanding debt, to avoid late fees. But you can also choose to pay back more than the minimum amount – which will result in you paying less interest in the long term.

Paying back what you owe on time will have a positive impact on your credit score and can lead to your lender giving you access to higher credit limits and better interest rates, as well as an increased likelihood of being approved for a loan or mortgage in the future.

Is a credit card suitable for me?

This can depend on what you’re looking to use the credit card for. Important factors to consider are whether you can borrow responsibly and reasonably, and remain financially stable. Using a credit card can have a negative impact on your credit score— for example if you repeatedly exceed your credit limit, miss your minimum monthly repayment date, or repeatedly apply for credit cards. This can make it difficult to apply for credit in the future.

Depending on what type of credit card you apply for, you might be also be able to withdraw cash, pay by contactless payment and use your credit card abroad. You may have to pay fees for these services, so it’s always worth checking the terms of a credit card before you apply for one.

If you feel a credit card is something you’re interested in, there are a range of different credit card types available, with differing terms, purposes, and benefits, which may suit you no matter your financial situation or credit needs.

Balance transfer credit cards

If you have existing credit card or store card debt and you’re trying to keep your monthly repayments as low as possible, then a balance transfer credit card might be a useful option for you. Effectively, the purpose of this type of card is to transfer your existing credit card debt to a lower interest rate or 0% balance transfer card, which then allows you to pay off the credit card debt at a lower interest rate or interest-free.

Balance transfer credit cards can charge between 3 to 5% of the debt for transferring a balance over to a new balance transfer credit card, depending on which card you’re looking at. At the end of the 0% interest period, you’ll be charged interest at the card’s standard interest rate. However, if you do your research on transfer charges and keep on top of your repayments before the 0% interest period ends, you may save yourself a sum of money in the long term.

It’s important to keep an eye on your repayments – depending on the terms and conditions of the card, missing a repayment could result in losing your promotional interest rate.

Here at The Co-operative Bank, we offer our own 0% balance transfer credit card.

Cash-back and reward credit cards

Owning a cash-back credit card can offer you some financial incentives when making purchases with the card. Depending on where you look, some banks or credit card companies may offer favourable introductory rates, sometimes as high as 5% cash-back on all purchases. Once this introductory period has expired however, the cash-back rate on purchases is likely to drop to the industry standard for cash back credit cards, typically from 0.25% up to 2%.

Reward credit cards are very similar, but rather than offering financial incentives, they will usually offer benefits instead; such as points to spend in certain stores, airline miles, vouchers, and redeemable goods and services provided by specific retailers.

For both cash-back and reward credit cards, much like with every other type of credit card, it’s important to keep an eye on your repayments – depending on the terms and conditions of the card, missing a repayment could result in losing certain benefits entirely.

Here at The Co-operative Bank, we offer our own cash-back credit card for Co-operative Members.

Low-rate credit cards

Low-rate credit cards are where the APR (annual percentage rate), or standard interest rate, is on average quite low. This type of credit card is best if you think you’re going to use your card infrequently for purchases, and plan to pay the balance off over a set period of time rather than all in one instalment within the initial interest-free period.

This type of credit card might appeal to you if you have a below average credit history. Many banks and credit card companies use your credit ratings when deciding the interest rate on a credit card you’re applying for – they would offer higher interest rates if you have a lower credit rating. If this applies to you, low-rate credit cards may offer lower rates despite your credit history.

Read about how to check your credit score.

Interest-free credit cards

Interest-free cards, or ‘purchase credit cards’, are credit cards that don’t charge interest on a purchase for a limited time. For example, you could make a large purchase on a six- month, 0% interest, deal and as long as you pay back the total amount within that six-month period, you won’t be expected to pay any interest.

These cards are great if you’re not comfortable paying the full cost of a large purchase up front and would rather spread the cost over a set period of time, or for making smaller purchases you know you’ll be able to comfortably repay within the interest-free period.

After the set period, however, the interest rate will reset to the base interest rate of the card— which is generally higher than it is with other types of credit cards to make up for the period of 0% interest. So it’s important to keep on top of your repayments, monitor the outstanding balance, and ideally clear it within the 0% interest period.

Fixed rate credit cards

When a rate is advertised as variable, it means that it could go up or down. Fixed rate means your interest rate won’t change for a set period of time.

After the fixed rate period is over the interest rate will typically change to a new rate. You should always check to see how long your fixed rate lasts.

Here at The Co-operative Bank, we offer our own fixed rate credit card.

Overseas cards

When you use your credit card abroad, with some providers you may incur some fairly substantial charges for doing things like withdrawing money, booking hotels online, and making payments in shops. If you’re a frequent flyer, or just fancy planning ahead before your next trip, an overseas card may be useful as they’re designed specifically to avoid fees like these.

They also help to reduce the risk associated with withdrawing large amounts of cash to take abroad. A no-charge, overseas card gives you more freedom and security to pay with a card rather than carrying around cash and having to get it out every time you want to pay for something whilst in a different country.

What else should I know?

You can check what your credit score is by searching online for ‘check credit score’. Companies offer ‘soft check’ services which won’t affect your credit score, so they’re a risk-free way of checking how likely you are to be approved, which type of credit card might suit you, and whether you need to improve your score before applying to avoid being rejected and further reducing your credit score.

Any purchases of between £100 and £30,000 you make using a credit card may be protected under Section 75 of the Consumer Credit Act. This means the credit card provider is held equally as liable as a retailer if something goes wrong with a purchase, such as if the goods you ordered arrive late or not at all, or if the company you bought from goes out of business. The provider must help you try to resolve the problem.

I’m interested in getting a credit card

If you’re interested in what credit cards we have available, you can view our range of credit cards here.

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