Types of Consumer Credit Cards
When credit cards were first issued by banks, the method was pretty straightforward. Instead of paying for an item with cash, consumers would hand the merchant their credit card. The merchant would check the card’s number against a monthly blacklist issued by the credit card company and then run the card through an imprinting machine. After completing the purchase information by hand, the merchant would then mail the signed credit slip to the credit card company.
Today, the process is simpler and faster. Merchants can run credit cards through a processing machine or built-in software to get automatic credit approvals and immediate payment processing.
Since those early days of credit cards, the credit card industry has grown and expanded to include a variety of consumer options:
- Standard credit cards.
American Express, Visa, MasterCard and Discover are the primary all-purpose “unsecured” credit cards in use today. All four provide revolving lines of credit, with no collateral or deposit requirements, which allow users to charge against their credit line or limit. These standard credit cards typically require strong credit scores, though lenders are willing to take some risks on borrowers with marginal or no credit.
- Debit cards.
Bank-issued debit cards have partnered with MasterCard and Visa to create a hybrid tool. No credit is extended, but the debit card can be used wherever those credit cards are accepted. The user’s credit limit is basically the balance maintained in the checking or savings account behind the debit card.
- Retailer credit cards.
Many retailers have adopted credit cards to streamline their in-store credit programs. They work the same way as standard credit cards, but they can only be used with the retailer(s) issuing the card. In addition to department stores, retailer credit cards are also provided by gasoline companies, restaurants and even coffee shops (i.e. Starbucks).
- Student credit cards.
College students often have no credit, but many credit card companies see them as valuable opportunities for finding long-term clients. For students and recent graduates, student credit cards provide a great opportunity to start building credit. Student credit cards are standard credit cards requiring no collateral or security, though some creditors may require a parent to co-sign.
- Secured credit cards.
Designed primarily for consumers with damaged or bad credit, secured credit cards provide credit cards for people who would otherwise not qualify for standard credit cards. The borrower will have to make a cash deposit, which will serve as collateral for the revolving credit line. The borrower’s security deposit will also determine the maximum credit limit available for the secured card user.
- Prepaid credit cards.
Another option for consumers with bad or no credit is the prepaid credit card, which acts much like a debit card. Prepaid credit cards may be purchased for a set amount and may be used anywhere that MasterCard or Visa (depending on the card) are accepted. Prepaid card users may charge purchases up to the amount prepaid on the card, and many cards do allow borrowers to replenish or increase the prepayment amount.
- Gift cards.
The most common type of prepaid cards is the ubiquitous gift cards, which have become especially popular during the holiday season. Although most are limited to specific retailers and merchants, the major credit card companies also provide gift cards that can be used with any merchants that accept those credit cards.
- Reward cards.
A subset of standard credit cards, as well as of some secured and retailer credit cards, reward cards offer loyalty incentives for users. Rewards include cash back on qualified purchases or points that can be used to make purchases in special rewards catalogs.
- Frequent flier cards.
A popular variation of reward cards offer frequent flier points and bonuses for qualified purchases made with the credit card. Frequent flier cards are sponsored by an airline and provide points to a consumer which can be redeemed for airline tickets.
The reward points and frequent flier bonuses offered by many credit cards serve an effective purpose for credit card companies: they encourage greater use of those credit cards. In fact, many people have started using credit cards for even bigger purchases including automobiles, home rehabs and even timeshare units – just so they can get the additional reward bonuses.
Today’s consumers have many more options when it comes to getting a credit card. One thing that hasn’t changed is the responsibility that comes with each card. Credit cards are valuable tools, but they must be used and managed properly to avoid negative impacts on personal credit scores.