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How Credit Cards Work

By: Melanie Radzicki McManus  | 

Credit Ratings and Card Types

If you've had credit problems, you might have to settle for a credit card with a slightly higher interest rate. If you have poor credit or no credit, some banks will issue you a secured credit card. This means that you deposit money into a savings account that acts as collateral against your credit line. A secured credit card's interest rate and/or associated fees may be high, but it offers you the convenience of a credit card while you work on rebuilding your credit. Secured cards are often the best option available to those with a bankruptcy in their past. Be sure to choose a secured card that pays you interest on your deposit.

If you have a very good credit score and would like a higher spending limit or extra perks, check into applying for a gold card or platinum card. These cards often carry steep annual fees (Amex's platinum card cost $695 per year in 2021) and may require you to pay off the balance in full every month. But depending upon your circumstances, the extra perks you receive for these fees may be worth it. Perks may include earning points on purchases toward a rewards program or even dining credits.

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With all of this money getting spread around, and lots more of it out there, it's no wonder why most of us are constantly receiving notice that we're "pre-approved" for an endless stream of credit cards. There's got to be a catch ...

Sometimes there is, and it goes like this. Let's say you get an offer for a new credit card account with a pre-approved credit limit just slightly higher than the balance on your current card. The fine print many of us ignore could reveal an extremely high interest rate, plus a notation that by accepting the offer, you agree to transfer the entire balance of your other credit card account to this new, high-interest account.

Obviously, you don't want to pay more interest each month, so always read all of the details before signing on. And before you toss one of these offers into the garbage, shred it so that no one can fish it out and try to impersonate you.

No matter what kind of card and plan you choose, you should have access to the following information under the federal Truth in Lending Act so that you can compare one loan to another:

  • Finance charges in dollars and as an annual percentage rate (APR)
  • Credit issuer or company providing the credit line
  • Size of the credit line
  • Length of the grace period, if any, before payment must be made
  • Minimum payment required
  • Annual fees, if applicable
  • Fees for credit insurance (if any), which pays off your loan if you die before the debt is fully repaid

Card Types

There are three basic types of credit cards:

  • Bank cards, issued by banks (for example, Visa, Mastercard and Discover Card)
  • Travel and entertainment (T&E) cards, such as American Express and Diners Club
  • House or store cards, which are good only in one chain of stores or gas stations (think Sears, Shell, etc.)

T&E cards and national house cards have the same terms and conditions no matter where you apply.

You may also be familiar with what is known as an affinity card. This card — typically a Mastercard or Visa — carries the logo of an organization in addition to the lender's emblem. Usually, these cardholders derive some benefit from using the card — maybe frequent-flyer miles or points toward merchandise. The organization solicits its members to get cards, with the idea of keeping the group's name in front of the cardholder. In addition to establishing brand loyalty, the organization receives some financial incentive (a fraction of the annual fee or the finance charge, or some small amount per transaction, or a combination of these) from the credit card company.

No one card is right for everyone. Basically, the right card for you is one that's accepted where you shop and charges you the smallest amount of money for the services you use. Almost any U.S. business or establishment that takes Mastercard also takes Visa, and vice versa. So if you only spend money in the United States, you probably don't need both.

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