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Q: How many different kinds of credit cards are there?
A: There are three basic types of credit cards, each with its own special credit characteristics and uses. The bankcards, Visa and MasterCard, are the most common and widely recognized, and are issued only by banks, savings and loans, and credit unions. They give merchants the opportunity to sell their goods and services on credit. The card-issuing bank pays the merchant for its merchandise, less a nominal service charge. The advantages to the merchant are that they avoid financing their accounts receivable, and they assume no credit risk or credit and collection costs. They are also often able to generate higher sales (many of which are impulse purchases) because their customers can buy on credit.
Each issuing bank sets its own credit policies, such as fees, credit criteria and limits, interest rates, billings, and the like. Visa and MasterCard do not themselves issue cards; they serve only as a clearinghouse for participating banks that are licensed to use their name and logo. All actual credit transactions – including adjustments, disputes, and credit losses – are handled completely between the customer and the card-issuing bank.
The second credit card category is comprised of the travel and entertainment cards (American Express, Diner's Club, Carte Blanche, etc.). T&E cards are not, however, exclusively intended for travel and entertainment purposes or expenses. Virtually any consumer goods or services can be bought using these cards. T&E cards usually require full payment of all charges each month (the bankcards, on the other hand, encourage installment payments, which earn them substantial interest income). Because there is only one source for each T&E card, they are typically more difficult to obtain than bankcards. T&E card companies also have stricter policies regarding late payments.
The third category of credit cards is the merchant or 'affinity' credit cards. They are the oldest type of credit card and involve only the merchant and its customer. Merchant cards are primarily issued by department stores, retail chains, oil companies, airlines, car rental agencies, and similar sellers of goods and services. They rarely charge annual fees and, like bankcards, generally encourage making extended payments in order to stimulate consumer spending and also to earn themselves interest.
Q: How many credit cards should I carry?
A: You really don't need handfuls of credit cards. It is the wise use of the credit cards that you have that's important, not the number of cards you possess. Banks closely track their cardholders, and most institutions want to know how many other credit cards you have before they'll issue you one of their own. Banks also share computerized cardholder information. When one bank within a credit card system – either Visa or MasterCard – discovers that you have too many cards (each bank sets its own policy on how many cards are allowed), they will automatically reject your application, regardless of the type of credit you have. Additionally, owning too many cards can lower your credit score.
Q: Other than finance costs, what other features should I look for in a credit card?
A: In addition to finance charges, you should also consider the extent to which the card is accepted, the credit line, purchase protection, any traveler's and buyer's assurance programs, rebate programs, personal check cashing, frequent flyer and bonus mileage programs, year-end activity summaries, and credit card registration options that may be offered. These additional services can be quite valuable or utterly useless, depending on your personal lifestyle and preferences.
Q: Which are the most important features to compare?
A: For most consumers, a card's transaction fees, annual membership fees, annual percentage rate (APR), and credit limits are the four most important points to evaluate and compare.
Q: What is a transaction fee?
A: Banks are well aware that only about half of their cardholders pay their full outstanding balance each month to avoid finance charges. To compensate for this loss of income (in other words, to increase their revenue), they often impose per-transaction fees. For example, you may be charged, say, ten cents each time that you use your credit card. And while you considered their $10 annual fee a great bargain, you neglected to take notice of their transaction fees, which can add up very quickly. So check any such fees carefully. In the long run, bankcards that don't impose transaction fees are usually far less costly to maintain than those that charge them.
Q: Are there any 'hidden charges' that I may encounter with credit cards?
A: Credit card contracts might omit or mention only in fine print many different hidden charges. For instance, a bank may not charge an annual fee but instead charge a
Additionally, be watchful of the grace period (if one is given). A bank may charge a late fee of $20 or more if your payment is tardy by even one day. And be most careful of variable-rate cards. With these, the bank indexes the APR charged to the Prime Rate or a Treasury-bill interest rate. Some cards have tiered rates; the higher your outstanding balance, the lower the interest rate.
Q: Are there any other 'dark features' that I should watch for when choosing a credit card offer?
A: Yes, there are a few. Avoid credit cards that charge a fee for no activity or too little activity during their billing period. And steer clear of cards that offer a low initial APR (which will usually rise within a matter of months), offer incentives or rewards (these cards usually feature an above-average APR), or escalate their annual fees.
Q: How are annual membership fees assessed?
A: Annual membership fees create a significant boost to banks' credit card incomes. Because many cardholders pay their full monthly balance to avoid finance charges, banks often resort to annual fees and/or transaction fees to make up those lost profits from their cards. Some institutions will even waive their annual fee provided that you keep a minimum balance on your card account. And annual membership fees are a significant earnings source for the T&E card issuers. Through their various prestige levels (Gold, Platinum, etc.) they offer a wide range of benefits (travel services, hotel and rental car discounts, and so on) that may offer conveniences and savings to the cardholder, and definitely produce major additional revenue for the card issuer.
Q: Are merchant accounts always reported to the credit bureaus?
A: No, not always. Payment histories of merchants' accounts or merchant credit cards are generally less frequently reported to the credit bureaus than those of the other credit cards. But most credit applications ask for information about other credit and credit card accounts, and a good payment record on a merchant account can be a definite aid in any efforts to establish, build, or rebuild your credit. Furthermore, if your merchant account is not being automatically reported, it may be just a simple matter of submitting a written request to the merchant asking that they begin reporting your account to one or more of the major credit bureaus.
Q: I am literally inundated with credit card solicitations. Why are there so many?
A: Credit card companies are in a highly competitive industry and marketplace, and they issue several billion credit card solicitations each year. Moreover, the credit scores necessary for a consumer to obtain a credit card have steadily dropped since the 1990's. This means that there are many more people who would generally be known as poor credit risks that have credit cards in their wallets today.
Q: Why are credit card companies so indiscriminate in extending credit?
A: The credit card companies see it as a numbers game. They understand that there will be a number of defaults, but this will be more than compensated for by their huge profits from finance charges, membership fees, and earnings from their many supplemental marketing programs.
Q: How can I find banks that issue good credit cards?
A: Banks actively compete for new cardholders, so one place that you might look is in your mailbox. Another good starting point is to inquire where you now bank. Be aware, however, that lending institutions which offer lower interest rates may have more rigid credit policies. Banks that offer higher-rate cards tend to be somewhat more credit-lenient. Larger national banks more aggressively seek new accounts, but don't overlook your local savings and loans or credit unions; they're generally good credit card sources. Also, check with your professional, business, trade, civic association. They might sponsor group bankcards and, as a member, you may find it easier to obtain their credit card and they may also have negotiated a good deal with the issuer.
