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Credit Cards

There are many different types of credit cards in the market. So how do you find the card that is right for you?
Perhaps begin by thinking about how you use credit …

Evaluating Credit Card Options

Unsecured credit cards are the primary credit card used today and the different types are described below. As
an overview, these cards differ from secured and debit cards in that they require no collateral or down payment as
well as providing you with the ability to make purchases up to your credit limit. If you do not pay your balance in
full each month, a finance charge will be applied to any outstanding balance. Your minimum monthly payment is
generally 3-5% of your balance. A word of caution: making only minimum payments on your account will greatly
increase the time it will take you to pay off the balance. You can avoid paying finance charges by paying your
balance in full each month.

General-purpose credit cards are cards that can be used to pay for just about anything – clothing at a department
store, gasoline, meals at restaurants, medical services, utilities, products for sale on the Internet, as well as to get
cash advances. Another advantage of using this type of card is that it combines many different types of expenses
into a single bill, making payment easier. These types of cards are issued by banks and other lending institutions,
and generally carry either the Visa, MasterCard, or Discover affiliation.

Store credit cards are single-purpose cards that can be used only in a specific store or group of stores, or for a
specific purpose. Examples are retail cards like Macy’s or Nordstrom’s, or gasoline cards like BP or Shell. In
general, interest rates on store credit cards are higher than those on general purpose cards. Store cards tend to be
offered at the “point-of-sale” by enticing customers with an immediate discount on their current purchase (usually
an additional 10% – 20%).

Premium cards such as Platinum or Gold Cards are cards that offer additional benefits or perks such as travel
upgrades, cash-back options, insurance coverage, or airline miles programs. Generally, premium cards require an
excellent credit history, a certain annual income level, offer a higher credit limit, and may offer a lower APR than a
standard card.

Charge cards provide you with the convenience of a credit card based on your agreement to pay the full amount
of the charges due each month, so there is no finance (interest) charge. American Express has traditionally offered
these types of cards. Note that there is often an annual fee that is charged ($100-$500) for the convenience of using
the card.

Affinity credit cards are associated with specific organizations and offered only to those affiliated people.
Generally, an affinity credit card is co-branded by an organization, and the organization receives a percentage of
the sales or profits generated by the card. Loyola University Maryland Visa Card is an example. Rates, fees and
benefits of affinity cards vary widely, and may make these cards more expensive to use than similar, non-affiliated
cards.

Co-branded credit cards are co-sponsored by two companies and have benefits and rewards designed specifically
for their joint customers. For example, the Southwest Airlines Chase Sky Miles Card is as example of a co-branded
credit card.

Secured cards are credit cards guaranteed by a bank account or deposit made by the applicant. The credit limit
is based on the amount of deposit and may be the same amount or larger. Secured credit cards can be useful to
establish or improve a credit record, particularly if someone has never had credit or has a poor credit history.

Debit cards access the money in your checking or savings account to pay for purchases. The payment amount is
transferred from your account to the merchant’s account the same day. An advantage of using a debit card is that
you can’t spend money you don’t have because you aren’t buying on credit. A disadvantage is that debit cards are not
subject to many of the consumer legal rights that apply to credit cards regarding returns, resolution of errors, fraud
or other issues

How to Manage a Credit Card:

Credit is often considered negative; however, most of us need to use credit at some point in our lives—to purchase a
home, finance a college education, or buy a car. Not all credit is created equal, and it’s important that you use credit,
especially credit cards, wisely, to ensure that you won’t find yourself in debt beyond your means:

Using restraint in using credit cards

If you want to use credit cards wisely, only make purchases that you know you can afford. You should have enough
money in the bank to pay off the purchase when the bill becomes due. Tempting as it is to buy the things you want
now hoping that you’ll have enough money in the future to pay them off, living on credit is an expensive, and
uncertain, habit to get into. In fact, you may find that you’ve paid the bank more money in interest than the item
actually cost!

In addition, to avoid late fees or interest fees, make sure you pay off the card well before the due date. Using your
bank’s Web site to pay your bill will help ensure your payment is received on time.

If you find yourself unable to restrain from reckless spending or unable to make payments on time, consider using a
debit card that’s linked to your checking account. By using a debit card, you’ll still have a record of your purchases
but won’t pay interest or late fees.

What if I just pay the minimum balance due?

Until legislative changes in 2004, the minimum payments on credit cards tended to be lower than the accrued
interest and fees. This resulted in “negative amortization” or the principle owed increased every month. The current
standard for determining the minimum payment is usually 3% to 5% of the balance, plus fees and interest, plus 1%
of the principle. To illustrate how the minimum payment effects what you will pay and what you will owe, consider
that the average credit card debt for college students is approximately $3,0001
. With an average general-purpose
credit card averaging 18% annual percentage rate (APR), about 1.5% of the balance due is added each month in
interest. Paying the minimum, 5.5% monthly2
on $3,000, would take 6.7 years to amortize (pay off) and cost you
nearly $4,100!

Most credit cards generally have a “grace period” (usually 30 days) that if the balance is paid in full, no interest accrues. However, if any part of the balance remains, interest is accrued for the entire daily balance. For instance, if you charge $1,000 on the first day of your billing period and you pay $999 on the last day of your billing period, your interest will be calculated based on the daily balance for the entire period and not just the last dollar remaining.
In short, with an 18% APR credit card, you will still owe one dollar… plus $14.79 more in interest.