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 best suit your needs.

Let’s start with the basics.

So 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.

A credit card is something which you have to apply for. 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, which isn’t taken from your current account but rather money 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.

Depending on what type of credit card you apply for, you might be able to do similar things as you would with your debit card, like withdrawing cash, paying by contactless payment, and using your credit card abroad. You may have to pay fees for additional functions, so it’s always worth checking the terms of a credit card before you apply for one.

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 in the future or even a mortgage.

Is a credit card suitable for me?

This can depend on what you’re looking to use the credit card for. Responsible and reasonable borrowing as well as being financially stable are both important factors when it comes to considering a credit card. Repeatedly exceeding your credit limit, missing your minimum monthly repayment date, and repeatedly applying for credit cards can have a negative impact on your credit score— which can make it difficult to apply for credit in the future.

If you feel a credit card is something you’re interested in though, 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. Below, we’ll take a look at what kind of credit cards are usually available across the UK market.

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 considering 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%– 5% of the debt for transferring a balance over to a new balance transfer credit card, depending on which card you’re looking at, and 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 cards 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, 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 for purchases.

This type of credit card might appeal to you if you have a below average credit history, as a lot of Banks and Credit Card companies tend to use your credit ratings when deciding the interest rate on a credit card you’re applying for. The lower your credit rating, the higher the interest – thus low-rate credit cards are here to accommodate for that.

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 and monitor the outstanding balance until it’s ideally clear 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 pretty 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 of withdrawing large amounts of cash to take abroad; as a no-charge, overseas card gives you more freedom and security to pay with a card rather than carrying around cash every time you want to pay for something whilst in a different country.

What else should I know?

If you use your credit card on purchases between £100 and £30,000, you’ll be provided with extra protection thanks to Section 75 of the Consumer Credit Act. This means that lenders are held equally as liable as retailers if something goes wrong with your purchase, such as if the goods you ordered arrive late or not at all, or if the company you bought from no longer exists.