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The Basic Credit Card Types

It might sound unbelievable, but credit card companies send out over 2.5 billion deals per year inviting customers to apply for credit cards. And those who may not be eligible for a standard credit card due to significant credit concerns can now receive one; some credit card issuers even specialize in this market.

Financial analysts estimate that there are at least a billion credit cards in circulation in the United States alone. For a long time, credit has been a pillar of the economy. According to surveys, the average American household has at least twelve credit cards, including charge cards. While you might assume that one credit card is pretty much the same as the next, each credit card form has its own set of characteristics. It's important to understand the differences between the three types of credit cards available: bank credit cards, travel credit cards, entertainment credit cards (although the mixed travel and entertainment card is becoming more common), and retail credit cards or house cards.

Bank Credit Cards

You've already noticed that most credit cards display the Visa or MasterCard logo along with the bank's name. The credit card appears to have been issued by either Visa or MasterCard. This is not completely correct: these two companies do not explicitly issue credit cards to customers.Thousands of banks around the world sell the majority of credit cards on the market today. Each bank is affiliated with the credit card association and they are not authorized to issue any form of card unless they are members of the association.

Visa is a privately owned membership company that is planning to go public in the near future. It began as a group of banks from California and the West Coast. There are over 20,000 financial institutions on the Visa Card's membership list, and almost all of them accept Visa. MasterCard, like Visa, is a membership organization that was established by member banks from the East.

A revolving credit line is what a bank credit card is. You can pay all or part of your balance per month when you receive your statement, then run up the balance again, and so on. Since the account is a credit line, it has a pre-determined credit cap that is dependent on main factors such as discretionary income, credit history, and so on. The credit limit can range from $100 to tens of thousands of dollars.

When cardholders do not properly handle their revolving credit line, they risk getting themselves into trouble. When you keep a balance on your credit card instead of paying it off, the credit card company continues charging interest on it, which can be very high in some situations. The interest rate varies greatly depending on who approved the card, but you can expect a credit card interest rate of about 18 percent on average.

For example, if you bring a $1,000 balance forward for a year, you will pay $180 in interest, or $15 per month. You can collect around $40 in interest per year if you keep a $1,000 savings account open. Many who find themselves in debt would need to reduce their debt, and one of the most common ways to do that is to prepare for credit card debt reduction, which decreases the amount of interest owed.

Travel and Entertainment Card

In the same way that bank credit cards allow cardholders to charge purchases at different retailers and locations, travel and entertainment cards do as well. They are, however, distinct from bank credit cards in that they are sold directly by credit card firms, such as American Express and Diners Club.

This credit card was once only approved at travel and entertainment-related establishments like airlines, hotels, restaurants, and car rentals. They are also allowed in all other businesses, including upscale department stores, gas stations, and drugstores. The average travel and entertainment card today, like any bank card, comes with the same features that most credit card holders have come to expect, such as frequent flyer miles, baggage insurance, and auto insurance coverage on rental vehicles.

Another distinction between travel and entertainment cards and bank cards is that travel and entertainment cards do not come with an extended credit line. This ensures that in order to keep your account current, you must pay your remaining balances in full within one or two billing periods.

At the end of each year, all travel and entertainment credit card companies, such as American Express and Diners Club, send classified summaries of expenses paid to the credit cards. This is a huge time saver when it comes to filing taxes.

House Card

Unlike a bank credit card or a travel and entertainment card, which can be used at several locations, a house card is only accepted at a single store or chain of stores. House cards (also known as retail charge cards) are the second most common form of credit card, with major issuers including department stores, oil and gas firms, and telecommunications companies.Before it was acquired by a financial institution to become a separate credit card company, Discover Card, which was once owned by Sears, was possibly the largest house card.

House cards are popular among retailers because they assist them in building customer loyalty and increasing sales; you can appreciate the convenience they offer when shopping. House cards, like bank credit cards, provide you with a line of credit with a variable cap based on your creditworthiness.As a result, you might opt to pay your credit card bill in installments rather than in full each month. However, the majority of house cards have fixed interest rates of 18 to 22 percent a year, making a house card more costly than a bank credit card in terms of interest costs.

If you use some kind of credit card, you will incur fees. You should select the credit card that best suits your personality and needs after learning about the various credit card forms. If you have a lot of credit cards in your pocket, you may want to get rid of some of them.

If you don't carry a monthly balance, a credit card with no annual fee is a good option, just make sure there is a grace period on transactions. If you already have a balance, however, you can avoid using a credit card that has any of the following:
  • High interest rates
  • Unfavorable interest calculations. Interest charges on a credit card can bedetermined based on the average daily balance rather than the balance due.
  • No grace period. Even if you pay off your balance, some credit cards may charge interest from the date of purchase to the payment date.
  • Nuisance fees. Avoid credit cards with late fees, overlimit fees, fees for not carrying a balance or only a balance below a certain amount, or fees based on a percentage of your credit limit.

Bank of America was the first to launch the new bank credit card in the 1960s, while travel and entertainment credit cards were launched in the 1950s. While much has changed in terms of features and benefits since then, the fundamental characteristics of each form of credit card have remained consistent.