What credit cards are there?

There are so many types of credit cards available on the market it can be hard to know which one matches your requirements. From balance transfer credit cards, purchases credit cards and all-rounder credit cards how do you know which to choose?

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What is a credit card

A credit card is a cashless payment method. Unlike a debit card, it doesn’t access available funds from your bank account. A credit card comes with a credit limit, i.e. a limit on how much money you can borrow from your credit card provider.

When making a purchase with a credit card, your credit card provider pays and they issue you a bill each month. You can either clear your balance (pay the full amount owed) which will likely mean you pay no interest or you can opt to repay smaller amounts (so long as you pay the minimum amount).

Opting to repay smaller amounts each month means your current balance will be carried over to your next statement. Unless you have a 0% offer, carrying your balance over will mean you are charged interest on your whole balance.

What type of credit card do you need?

There are many different credit cards available on the market.

The two that come to mind might be balance transfer credit cards and purchases credit cards. However, there are more types of credit cards. Knowing what you from a credit card can help you to determine which type of card you need.

  1. Have you already got a credit card or store card that you are paying interest on?

    If you are looking to clear your credit card or store card debt, you could significantly reduce the overall amount you repay by transferring the balance from your current cards to a new 0% balance transfer credit card. Alternatively, an all-rounder credit card would allow you to transfer your existing balance and make new purchases as they offer 0% on both.

  2. Do need an alternative from borrowing from your overdraft to make a purchase?

    Overdrafts have become much more expensive in recent years, a 0% money transfer credit card could prove to be a more cost-effective way to borrow.

  3. Do you want to use a credit card for purchases but can’t commit to always re-paying in full each month?

    A 0% purchases card would allow you to purchase and carry over your balance each month without accumulating interest.

  4. Are you new to credit or do you have a poor credit score/profile?

    Sometimes referred to as cards for bad credit, these cards can help you to build or rebuild your credit profile. Just be sure you repay your balance in full each month as interest rates on these types of cards are much higher than other credit cards.

  5. You want to use a credit card for purchases and can commit to re-paying in full.

    If you are confident you can repay your balance in full each month, then get yourself a credit card that gives you more. Reward credit cards offer cash-back or loyalty points so long as you pay your balance in full each month.

  6. Do you travel or frequently make purchases online in foreign currencies?

    Travel credit cards offer near-perfect exchange rates so they can be a great addition to your wallet.

Credit cards explained

Need more detail on these different types of cards? Read on...

Balance transfer credit cards

A balance transfer credit card allows you to move the balance of existing credit or store cards to it.

This not only acts to consolidate debts - potentially giving you only one credit card balance to manage. But taking advantage of a 0% balance transfer card can also help you to become debt-free quicker as your repayments will go directly toward clearing your balance rather than paying interest.

Balance transfer credit cards come with varying 0% periods but typically you’ll be able to get one that lasts for over a year. This can give you more time to clear your debt, but keep in mind the cards with longer 0% periods tend to have a one-off fee when you transfer your balance. This fee is normally a percentage of the balance you are transferring, so be sure to read the product details carefully before applying.

Important things to know:

  • Clear your balance before the 0% period ends - typical interest rates after this period are 19.9 - 21.9% (and they can be even higher)

  • Do not* miss your minimum payment, this could result in losing your 0% offer and you’ll be charged a late fee which will be added to your credit profile

  • Transfer your balance within the given window (usually the first 60 or 90 days) to secure the 0% offer

  • Typically, you cannot transfer balances between credit cards issued by the same lender

  • It’s important to also note that balance transfer credit cards are not intended for new spending, as the interest rates can be significantly higher than other types of credit cards. If you need a card that allows you to do both, look at all-rounder cards.

All-rounder credit cards

All-rounder credit cards offer 0% introductory rates on both balance transfers and spending for a number of months.

While the 0% period on balance transfers is typically shorter on an all-round card when compared to a balance transfer credit card if you also need your credit card for purchases an all-rounder card can mean fewer credit applications on your credit report. This can help protect your credit score.

Important things to know:

  • Avoid using an all-rounder credit card to withdraw cash, it can be expensive.

  • Clear your balance or transfer again before the 0% period ends to avoid costly interest charges

  • Don’t miss your minimum payment, you could lose your 0% offer, you’ll be charged a late fee and a missed payment will be added to your credit profile, damaging your credit score

  • Transfer your balance within the given window (usually the first 60 or 90 days) to secure the 0% offer

  • Typically, you cannot transfer balances between credit cards issued by the same lender

Money transfer credit cards

There a small number of credit cards on the market that offer 0% money transfers. For a small fee, you can transfer money from your credit card to your bank account. This method of borrowing can be cheaper than a loan (for amounts under £3,0) and is likely to be cheaper than your overdraft.

These cards can be beneficial if a retailer you want to make a purchase from doesn't accept cards or if you're paying interest on an existing loan or overdraft – as you can use the cash to pay these off.

Important things to know:

  • After the 0% period ends the interest rate on these cards can typically be 21-24% or higher

  • As with any credit card, missed payments can result in fines and back marks against your credit profile

  • You’ll need to make the money transfer within the given time period (usually the first 60 or 90 days) to get the 0% offer

Purchases credit cards

A 0% purchases credit card can be the cheapest way to borrow. They offer a number of months of new spending with 0% interest so are most effective when used to make a necessary, planned, affordable one-off purchase.

Important things to know:

  • Clear your debt before the 0% offer period comes to an end or transfer your balance to a balance transfer card. When the offer period comes to end, your interest rate typically is 18.9-21.9% or higher.

  • Pay at least the minimum amount each month and stay within your credit limit or you could lose your 0% offer, be charged a fine and potentially have a black mark added to your credit profile.

  • Typically, these cards aren’t cost-effective for money or balance transfers.

Credit (re)building credit cards

Designed to help people build (or rebuild) their credit history, these type of credit cards are for people with bad credit or no credit history.

If used for normal spending and if you clear the balance in full every month, they can help with building (or rebuilding) your credit score.

However, it needs to be understood that paying in full is crucial. The interest rates for credit cards for bad credit are exceedingly high. Meaning you need to be strategic in how you use them. Only spend what you can afford to pay back, in full when you receive your credit card statement.

Important things to know:

  • Interest rates on credit cards for bad credit (or no credit) can be as high as 60%, so only spend what you can afford to repay or you’ll be hit with some serious interest payments

  • Missing the minimum repayment, like with any other card will result in a fee and a black mark against you on your credit profile. This will have the opposite effect of what you are trying to achieve with this type of credit card.

  • Exceeding your credit limit can result in a fee

  • Cash withdrawals can be expensive as you’ll incur a fee and interest from the moment you make the withdrawal. Cash withdrawals are also seen as a red flag by lenders.

Cashback/reward credit cards

Earn on the money you spend with a rewards credit card. As long as you repay your balance in full each month and don’t exceed your credit limit a rewards credit card will pay you as your spend.

You can the most out of these types of cards by using them for your normal spending, just be careful of overspending. If you don’t repay in full the interest charged can easily cancel-out the rewards.

Important things to know:

  • Don’t use a rewards card to withdraw cash. It’s costly and there are no rewards.

  • Typically, rewards cards have an annual fee just to have them. If you’re not using it, cancel it.

  • As with any credit card, missing your minimum payment will likely result in a late fee and a missed payment will be recorded on your credit profile. Remember, the interest on rewards cards can easily wipe out any rewards earned, so don’t bother with a rewards card if you don’t intend to repay in full each month.

Travel credit cards

Specialist travel credit cards are great for people who travel regularly or routinely make purchases in foreign currency while in the UK.

You’ll benefit from a near-perfect exchange rate and you won’t be charged a ‘non-sterling transaction fee’.

Important things to know:

  • The interest and fees charged for missing a minimum repayment can easily cancel out any gains from the change rate.

  • Missed payments will result in a late fee and they’ll be recorded in your credit profile

  • Exceeding your credit limit will result in a fee

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Tags: Credit Cards