Having a credit card can increase your financial freedom, as it offers an additional way to make purchases and build your credit history. The right card can help you reach your financial goals, whether you want to boost your credit score, earn rewards for your spending, or even pay down existing debts.
But with the multitudes of credit cards on the market, it can be hard to understand the differences between each card type and decide which one is right for you.
The good news is we’re here to help. Here are the ins and outs of the five most common types of credit cards, including their unique advantages and considerations along with tips to help you select the right card for your needs.
1. Unsecured Credit Cards
Unsecured credit cards are those not backed by a security deposit and they’re likely what you think of when you picture a traditional or standard credit card. Once approved, a credit card issuer extends you a line of credit with a maximum credit limit. You can then use your card to make purchases up to that limit.
At the end of each billing cycle, cardholders receive a statement outlining all the transactions on the card, the total balance owed, purchases plus interest and fees (if any), and the minimum payment due. Cardholders need to make at least the minimum payment for their account to remain in good standing. Paying off the balance in full each month may shield you from paying interest on your purchases, but if you carry a balance cycle to cycle, you’ll pay interest on the balance you owe.
Credit cards are a form of revolving credit, which means that when you pay down your balance, you’ll once again free up credit on the account that can be used for future transactions.
Advantages of Unsecured Credit Cards
Having an unsecured credit card provides you access to credit without the need for an upfront security deposit. You’ll have the freedom to make purchases using that credit anywhere cards from that issuer/network (such as Visa or Mastercard) are accepted, including in-store and online. Many cards also allow you to make cash advances — or take out cash — using your credit card, though fees may apply.
Using your credit card responsibly also helps you establish or build your credit history, potentially boosting your credit score. As a result, using your credit card may be a stepping stone to unlocking other forms of credit — for example, improving your chances of being approved for a personal loan, auto loan, or mortgage.
Considerations for Unsecured Credit Cards
Despite the many advantages of unsecured credit cards, there are some considerations to be aware of. There may be costs associated with using a credit card, including the interest rate — also called the Annual Percentage Rate, or APR — on purchases when you carry a balance from month to month and cash advances, as well as an annual flat fee.
Unsecured credit cards may also be inaccessible to those with poor credit or no credit history at all as some lenders require a good or excellent credit score to get one. If you’re brand new to credit, or you’re rebuilding your credit score, consider shopping for a credit card that may be easier to get — such as a secured credit card.
2. Secured Credit Cards
Secured credit cards are backed by an upfront cash deposit from the cardholder — typically a deposit equal to the card’s credit limit. For example, a customer may be required to provide a $500 security deposit in order to attain a $500 credit limit on their credit card.
Once you’ve made the deposit, you can use a secured credit card like a traditional or unsecured card. Each billing cycle, you’ll receive a statement outlining the transactions on the card, your total balance, and the minimum payment due. Similar to an unsecured card, you’ll need to make at least the minimum payment for the account to remain in good standing.
Advantages of Secured Credit Cards
The primary benefit of secured credit cards is the opportunity to build or rebuild your credit history. Lenders are more willing to issue secured credit cards to those new to credit or those with lower credit scores. As you use the card responsibly, you’ll demonstrate that you’re a trustworthy borrower, which helps increase your credit score.
To reap the most benefits from a secured credit card, make your payment on time each month, whether you’re paying the minimum payment, a larger portion of your balance, or paying your balance in full. Aim to maintain a low balance on the card as well. Using only a small portion of your available credit can help increase your credit score.
Considerations for Secured Credit Cards
While the low credit limits typically associated with secured credit cards have some advantages — such as less potential to overspend — they can also limit your financial freedom. So unless you increase your credit limit by making a larger security deposit, a low credit limit may prevent you from making large purchases with your card.
3. Rewards Credit Cards
If you’re looking to make your money work harder for you, a rewards credit card may be an attractive option. A rewards credit card is any secured or unsecured credit card that rewards you for purchases.
These rewards generally fall into one of three categories:
Cash Back Credit Cards
Cash back credit cards allow cardholders to earn a percentage of their cash back when making purchases using their credit card. For example, a card offering 2% cash back would offer 2 cents cash back per dollar spent. This cash can be redeemed as a credit on a cardholder’s statement.
Points Credit Cards
Points credit cards allow cardholders to earn points when making purchases using the card. Points can be redeemed for brand-name merchandise, gift cards, purchases at retailers, restaurants, cinemas, and more.
Travel Credit Cards
Travel credit cards allow cardholders to earn points or miles when using the card. Card issuers will typically offer a range of travel-related rewards, including discounted flights, hotel stays, and more.
Sometimes, rewards credit cards may offer a mix of incentives — for example, the potential to earn travel miles, as well as cash back on your purchases.
Advantages of Rewards Credit Cards
Rewards credit cards help each dollar work harder for you. If you prefer to use credit cards for your day-to-day expenses, you’ll likely be able to accumulate points, miles, or cash back quickly and start redeeming rewards.
Many rewards cards also offer introductory bonuses: the potential to earn a large amount of points, miles, or cash back for spending a certain amount within a given time frame after you receive your card. This means that opening a rewards credit card ahead of a major purchase and making your purchase within the introductory period may help you earn even more rewards.
Considerations for Rewards Credit Cards
Rewards credit cards are an attractive option for many shoppers, but they’re often only accessible to those with good or excellent credit. If you’re new to credit, or you’re rebuilding your score, it may be more difficult to get a rewards credit card.
Rewards credit cards may have higher annual fees than traditional credit cards in exchange for the potential to earn rewards. Some types of rewards may also expire over time. It’s important to select a card that offers rewards you’ll use before they expire in order to get the most value from your credit card.
4. Credit Cards for Students
Credit cards for students are ideal for credit beginners who are enrolled in secondary or post-secondary education. A range of credit cards are available for students, including unsecured and secured cards, as well as rewards cards geared toward students.
Advantages of Credit Cards for Students
Credit cards for students can be a great way to start building your credit history while you’re still in school. You usually don’t need an established credit history to get one, so a credit card for a student can be an ideal first credit card and a stepping stone to other types of credit.
Some credit cards for students are also rewards cards, allowing you to earn miles, points, or cash back on your purchases. And, because credit cards for students tend to have a relatively low credit limit — sometimes as low as $100 — you can limit your risk of overspending.
Considerations of Credit Cards for Students
While most cards for students have a low credit limit, they still come with the potential to overspend. Before opening a card for students, ensure you understand how the card works — including interest and fees for using the card, as well as how to make your monthly payments — to manage your credit responsibly.
Visit our Student Credit Card Education Center to learn more about credit cards for students, and how to use your card responsibly.
5. Co-Branded Credit Cards
Co-branded credit cards are typically unsecured credit cards that are distributed in partnership with a major credit card network (such as Mastercard or Visa), the issuer bank and another brand.
With a co-branded card, you can shop at all places where cards from that issuer are accepted. However, your potential to earn or redeem rewards is typically limited to shopping at the specific company or retailer co-branded on the card.
Advantages of Co-Branded Credit Cards
The main advantage of a co-branded card is the opportunity to earn greater rewards for your purchases at the co-branded retailer than you would with a typical rewards card.
Considerations for Co-Branded Credit Cards
While co-branded credit cards may offer great rewards for shopping with specific companies, their rewards for shopping at other retailers may pale in comparison to general rewards cards, which typically offer more flexible benefits.
When considering a co-branded card, carefully review the terms and conditions to identify what institution is backing the card and fully understand the implications of the rewards program. Interest rates tend to be higher on co-branded cards compared to traditional rewards cards, and it’s important to avoid the temptation to over-spend for the sake of earning rewards.
Weigh your overall spending habits to determine if applying for a co-branded credit card is worth it. And consider using a mix of regular and co-branded rewards cards to maximize your rewards, as long as you can manage each account responsibly.
Types of Credit Cards: Side-by-Side Comparisons
Learn the differences between each of these five credit cards at a glance:
| What it is: | Advantage: | Potential Drawback: | |
| Unsecured Credit Card | A credit card that allows you to make purchases up to your credit limit. | • Make purchases with the security of credit. • Build your credit history. |
• Fees, interest when carrying a balance. |
| Secured Credit Card | A credit card backed by a security deposit that allows you to make purchases and build credit. | • Accessible to those with limited credit. • Helpful for building or rebuilding credit history. |
• Low credit limits may hinder purchasing power on the card. |
| Rewards Credit Card | Any credit card that allows you to earn points, cash back, or other rewards when you use it. | • Earn points you can redeem for rewards. • Earn cash back on purchases. |
• Some rewards may expire. • Usually requires good or excellent credit. • May have an annual fee. |
| Credit Card for Students | A beginner-friendly credit card available to students age 18+. | • Accessible to students with limited credit. • Potential to earn rewards. |
• Fees, plus interest if you carry a balance. |
| Co-Branded Credit Card | A secured or unsecured card offered in partnership between a credit card issuer and another brand. | • Earn greater rewards when shopping with your favorite brands. | • May offer limited rewards at other companies. • Interest rate may be higher than other types of cards |
Using the Balance Transfer Option On a Credit Card
If you’ve been juggling debt across multiple credit cards — and you’re hoping to pay off that debt — a balance transfer may be an option for you.
Balance transfers allow you to move, or transfer, the balance from other cards onto your new or existing credit card. This can allow you to consolidate your debt across multiple cards onto one single credit card so you can make one monthly credit card payment to pay down your debt.
Advantages of Balance Transfers
The primary advantage of a balance transfer is the ability to consolidate and organize your debt. Transferring multiple balances onto one card allows you to streamline your credit management and make one monthly payment to pay down your debt.
Taking advantage of an introductory or promotional balance transfer offer may also help you pay down your debt faster. Balance transfer offers on new credit cards typically offer a low introductory rate: a reduced APR or even a 0% APR, for the first several months you hold the card. Promotional balance transfer offers on existing credit cards also offer a reduced APR for a specific number of months. This means more — or all — of your payment goes to paying down your balance rather than to interest.
Keep in mind that if you take advantage of a balance transfer offer, you may still be assessed interest on new purchases. That is because unless your APR for purchases is also 0%, you must pay your entire balance each month by the due date to avoid interest on new purchases. Balance transfer fees apply.
Considerations for Balance Transfers
While balance transfers can be a useful tool to pay down credit card debt, there are some potential drawbacks to be aware of.
Balance transfers are most appropriate when you already have your spending under control. In general, you should avoid making purchases when you carry a transferred balance because you may be assessed interest on new purchases.
Balance transfers may also carry fees. Most have a balance transfer fee — a flat fee or percentage of the funds transferred onto the card — as well as a higher APR once the introductory rate expires.
Tips on Choosing the Right Credit Card for You
Selecting the right credit card can help propel you toward your financial goals. The following three tips can help you find a card that meets your needs.
1. Reflect On Your Goals
Opening a new credit card account requires you to carefully assess your goals and current financial situation to find the most beneficial card for you. Before you start applying, check your credit score to gain insight into which card(s) you're most likely to be approved for.
From there, weigh your options to identify a card that suits your needs. If you’re new to credit, or you’re rebuilding your credit score, a secured credit card might be best for your goals. If you already have strong credit, upgrading from an unsecured card to a rewards card may be the most appropriate move.
Think about how a credit card fits into your bigger financial picture to identify the right card for your goals.
2. Understand the Terms for Each Card
It’s also essential to understand the terms of each card as you shop around. Fees and interest factor into the total cost of your card, and your spending patterns may influence which credit card is most appropriate for you.
If you rarely use credit cards, for example, you might prioritize finding a credit card with a low (or no) annual fee to save money — even if it means missing out on rewards. If you prefer to shop with credit, on the other hand, it may be worth investing in a card with a higher annual fee to earn rewards on your purchases.
Similarly, finding a lower-interest card may take priority if you often carry a balance from month to month, since it will save you money on interest. However, if you usually pay off your balance in full each month, your card’s interest rate may feel less important.
If your card offers an introductory bonus, make sure you understand how the interest and fees may change after the introductory period is over to make the most informed decision.
3. Make a Plan to Manage Multiple Cards Responsibly
For some consumers, the best strategy may involve a mix of credit cards as long as each card can be managed responsibly. You might opt for a rewards card for your day-to-day spending for instance, but seek out a co-branded card for your favorite retailer to earn greater rewards.
As you take out more credit, ensure you have a system in place to monitor your spending across multiple cards. Consider using mobile or online banking to check your balance regularly, and set up reminders or automatic payments to ensure you’re paying your bill on time each month.
These positive financial habits will help you stay on top of your credit, creating a solid foundation that can help you achieve your other financial goals.
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