The Different Types of Credit Cards

There are three general types of credit cards: bank cards, travel and entertainment cards, and merchant cards. Each type has its own special uses and credit characteristics.

Examine your options and carefully comparison-shop before you select a credit card. All cards are not all created equally, and choosing with knowledge and prudence can save a significant amount of money in fees and interest rates over the long term.

Bank Cards

Credit cards of this type (e.g., Visa and MasterCard) are issued only by banks, savings and loans, and credit unions. These cards give merchants the opportunity to sell their goods and services on credit. The issuing bank pays the merchant the amount of the transaction minus a service charge averaging from 1 to 4 percent. Merchants benefit from this arrangement because they avoid the need to finance their accounts receivable, thereby circumventing any credit risk and account collection costs. Cards can also help to generate higher sales-many of them impulse buys-because customers can "buy now and pay later." All of these benefits work to bolster the merchant's positive cash flow.

Each issuing bank sets its own credit policies-on qualifying criteria, credit limits, fees and interest rates, terms and conditions, billing, and so on. Visa and MasterCard do not themselves issue cards; they serve only as clearinghouses for participating financial institutions that are licensed to use their names. All actual credit transactions (including adjustments, disputes and credit losses) are between the customer and the card-issuing bank or other institution.

Travel and Entertainment Cards

American Express, Diner's Club and Carte Blanche are three well-known examples of travel and entertainment, or T&E, cards. Of course, T&E cards are not used exclusively for travel and entertainment; the vast majority of other available consumer items or services can also be purchased. American Express, for example, competes aggressively with bank cards on virtually every type of credit purchase. More vendors, however, are more likely to accept bank cards because they tend to charge the vendor a smaller service fee than do T&E card companies.

T&E cards may charge their cardholders annual fees of $50 to several hundred dollars. They generally require full payment of billed purchases each month. This differs from the policy of bank cards, which encourages monthly installment payments that earn the issuing bank substantial amounts of interest. Because there is only one source for each T&E card, they're somewhat more difficult to qualify for than bank cards. The T&E companies also have stricter policies on late payments and will more quickly revoke credit at any signs of financial difficulty.

Merchant Cards

Also known as affinity cards, merchant cards are the oldest type of credit card and involve only the merchant and the customer. Merchant cards are often issued by department stores, retail chains, oil companies, airlines, car rental agencies and the like. They rarely charge an annual fee and, as with bank cards, generally promote extended monthly payments in order to encourage buying and to earn additional interest.