What Are Credit Cards and Which Type Suits You Best?

There are different types of credit cards for different uses, which one suits you best?

• Credit cards are a form of short-term borrowing that enables you to borrow up to the credit limit set by the lender (usually a bank). Credit cards can be an easy way to get interest-free loans, valuable rewards, travel perks and shopping benefits. If used correctly, they can also help you build your credit score.
  
• But the costs far outweigh the benefits if you don't pay off your monthly balance. Any interest owed will quickly compound, and credit card companies usually charge very high interest rates in the first place! 
• Besides regular, bank-issued credit cards, there are reward credit cards, secured credit cards, and charge cards.

You’ve probably heard about the amazing (and dangerous) things credit cards do. On one hand, they can grant you bonus miles on your flights or cashback on your cinema tickets. On the other, they can fuel spiralling debt and have creditors chase people down, as you see in movies.

The truth is that like any tool, there’s no doubt that they can be very helpful or very dangerous, depending on how you use them. But wait, what exactly are credit cards? 

Available credit is the amount you can spend before you hit your credit limit. If your credit limit is $1,000, and you’ve already charged $300 to your card, your available credit is $700. If you make a $200 payment, the credit limit will go back up to $900. (This is why it has the name “revolving” line of credit).

In Short: Why Use Credit Cards?

1. Help build your credit score
2. Allow you to take out interest-free “loans” (if re-paid within the grace period)
3. Earn valuable rewards
4. Provide shopping benefits and travel perks
5. Lets you worry less about fraud (if used correctly)

3 Common Types of Credit Cards

(besides the vanilla, bank-issued ones - many of which also offer points, perks and rewards)

Reward Credit Cards

These cards offer rewards for their users, including cash back, statement credits or points for flights and hotel stays with selected partners. The rewards keep getting better with time and responsible usage. Nowadays, merchants collaborate with credit card companies to offer benefits like cashback, shopping offers and minimum purchase rewards to customers - sometimes issuing their own, branded cards. These act as customer incentives to enjoy more sales and customer loyalty. Such cards offer benefits centred around their target audience.

These include the Singapore Airlines Krisflyer card issued by American Express, Citi Lazada credit card issued by Citibank and many more. Another type of reward credit card is one that has a specific target audience like Women, Children or the Elderly. UOB’s Lady’s Card, DBS’s Woman’s Card, DBS Live Fresh Student Card, HSBC’s Revolution Credit Card.

Secured Credit Cards

Whereas most credit cards are “unsecured,” secured cards are meant for riskier borrowers who may be more likely to default on their borrowing.  As such, to get these cards, a security deposit is needed. An upfront deposit serves as your credit limit. The credit limit is usually about 80% to 100% of the fixed deposit collateral.

Some secured credit cards include UOB’s Lady Card, DBS Altitude card, POSB Everyday Card, UOB PRVI Miles Card.

Charge Cards

Not actually credit cards, but not too different from them. The main difference is that you can’t carry a balance from month to month, meaning you must always pay the statement balance in full by the due date. These cards don’t have a traditional set credit limit, although you’ll still have a limit to how much you can charge to the card in any one month. Not as common as they used to be, possibly because there's no opportunity for the card issuer to charge you interest at super-high rates!

THE DIFFERENT TYPES OF CREDIT CARDS. COMPLETED. ✅

Sources

1. https://www.investopedia.com/articles/pf/10/credit-card-debit-card.asp
2. https://learn.moneysmart.sg/credit-cards/credit-card-basics/how-do-credit-cards-work/
3. https://www.moneysense.gov.sg/articles/2018/10/understanding-credit-cards
4. https://www.creditcardinsider.com/blog/how-does-a-credit-card-work/#are-credit-cards-a-good-idea
5. https://www.moneysmart.sg/credit-cards/credit-card-bank-application-basics-ms
6.  https://www.singsaver.com.sg/blog/what-happens-when-you-cant-pay-your-credit-card
7. https://gendal.me/2014/08/09/
8. Cover photo from picjumbo