Types of Credit Cards and Proper Management

For people that can handle money responsibly and for some situations, credit cards are highly beneficial. With so many different types, people of different ages and incomes can get a card that meets needs but regardless, it is imperative that individuals understand if used irresponsibly, credit cards can be dangerous. After all, revolving credit makes it very easy for a person to charge rather than pay cash. If the balance on the card is paid back quickly or if the person carries a low balance, no problem but if cards are used for frivolous purposes and payments are low or late, then the credit report reflects negatively.

? The most common option for credit cards is the standard card, which has a revolving balance with applied interest rate and applicable finance charges if the balance is not paid in full prior to the end of the grace period.

? Another option is the secured card, typically used by people with bad credit in that a deposit would be made against the card?s credit limit and often, there are extensive fees.

? Balance transfer credit cards allow a person to take balances from multiple card accounts and roll them into one account with a lower interest rate, thus saving money.

? The rewards credit card is one where the cardholder is provided with perks in the form of free vacations, rental cars, and tangible items based on card usage.

? Student credit cards are those designed specifically for people in college with little to no credit history.

? Premium credit cards offer incentives and benefits that are much better than those provided with a standard card, such as reward points, travel or rental car upgrades, cash rewards, and more but the fees are often high and for a person to qualify, he or she would need a high FICO score and meet an income minimum.

? Limited purchase credit cards are those used only at certain locations, which would include retail stores or gas stations.

? Prepaid cards must have money loaded onto them and any purchase made comes off the cash balance of the card, meaning the consumer has to keep loading money to have money to spend.

? Business credit cards are those setup specifically for business use, often used for travel and other business related expenses.

One of the things that people need to be aware of when it comes to credit cards, no matter the type, to ensure a person?s credit score is reported in a positive way, certain rules apply. Using cards is not a bad thing but if not managed properly, cards can do significant damage to an individual?s credit score. When the credit report has negative information from card companies, the consumer finds it difficult, if not impossible to be approved for loans, get other credit cards, and even be considered for certain jobs.

For instance, the minimum payment on credit cards is actually based on a calculated formula involving a percentage of the balance. While the percentage is typically nominal, generally around 3%, if a person were only to pay the minimum amount due every month, it would take literally years for the balance to be paid in full. As a result, two things happen. First, the person ends up wasting significant money and second, the long-standing balance would be negatively reflected on the credit report.

Often, the minimum payment due on credit cards is not even enough to cover the interest being charged. A person with a $3,000 balance making the minimum payment of $75 needs to understand that anywhere from 30% to 50% of the $75 is going toward interest alone. Each month, the unpaid balance accrues even more interest so if that person continued paying only the minimum due, it would take 15 years or longer for the $3,000 to be paid. Again, the individual wastes a significant amount of money and the credit report is going to be affected in a negative light, thus lowering the FICO score.

Again, using credit cards is not bad but the key to being financially responsible and allowing the credit card to boost the credit score is by keeping balances limited and paying the balance in full within 30 days or paying much more than the minimum amount due monthly. Otherwise, a person would become trapped in the debt of credit cards, causing all types of problems.

When a person continues using credit cards and making only the minimum monthly payment, that person?s spending power is cut dramatically. With bad information being reported to the three credit bureaus, the individual finds trying to secure a home or car loan an impossible situation. After all, creditors wonder why the person is not paying more than the minimum amount due, making it appear as if the person might be in a tight financial situation. Obviously, this would raise serious red flags of concern that perhaps that person is high risk for paying back a home or auto loan.