I remember the first time I got a credit card.
The story takes place in a small, rural community outside of San Diego. I was living with a couple of friends, working part-time and trying to get through the last couple years of college.
Money was tight; so tight, in fact, I felt like I needed a bailout in order to steady my finances.
“So,” I thought, “Why not sign up for a credit card?” I’ll totally pay it back and, in the meantime, I’ll use it to buy for groceries and other essentials until my paychecks come in.
All through high school and into college, I promised myself I would never get a credit card. “It only leads to debt,” was my philosophy … but that was about to change.
Knowing I needed a bailout – or at least a way to make ends meet between paychecks – I signed up for a United Airlines points-based Visa card. I think I got an offer in the mail, filled out the application by hand, and then, one day, the card appeared in my mailbox.
It was an exciting moment. I opened up the envelope, pulled out the card and check the accompanying letter. My credit limit, as it turned out, was a meager $1,000, which tells you a lot about my credit worthiness and my income.
I called the number on the back of the card to activate it, then prepared myself to make my first-ever credit card purchase. CD player for my car? Nope. A new wardrobe? No.
I drove 15 minutes down the road to a fruit stand to buy a bag of cherries…that’s right, a bag of cherries.
For some reason, I couldn’t think of a better way to celebrate my first day of credit-card ownership than with a sack of delicious fruit. Obviously, there were better ways to celebrate, but I wanted to keep things simple and stick to my guns of sensibility.
I’ll never forget how excited – and amazed – I was about how easy it was to use the card to pay for stuff…even if it was just a few pounds of cherries.
And then, I got laid off.
My credit card, rather than being something I used while I was in a jam, became my source of “income” to make up for my lost job. Within a month, I’d maxed out the card and was paying costly fees for being over my limit and for paying late.
I don’t exactly remember what my APR was, but I would assume it was probably between 25 and 30 percent.
Not a very glamorous story, is it? When times are hard and there’s no money for groceries or gas, you tend to get desperate. For me, that meant steadying my finances with a credit card.
And, soon enough, I’d signed up for a Chevron card to pay for gas, as well as Target and Best Buy credit cards to purchase stuff I didn’t really need.
As times got harder, the balances got higher. Late fees were common. Discipline was not.
So, why am I telling you this story as a preface to an article about the different types of credit cards out there? Because I think my story is a common one.
For our own reasons – some unique, some not – we sign up for our first card and are kind of dazzled by the ease with which we can use it.
Eventually, the card becomes a crutch; you get in a position where you swipe your card to bail yourself out even though you can’t pay it back right away. When you do, credit card companies make money of late fees and interest. Your card ends up controlling you.
For people who are disciplined with their finances, though, credit cards aren’t crutches; they’re a tool to get stuff for free via great promotional offers. In other words, you use the card, the card doesn’t use you.
Most cards offer rewards, and those rewards usually fall into the following categories: travel, cash back, low APR and luxury.
First, a Warning About Who Shouldn’t Read This Article
I’m going to cover each one of these categories so you know what’s out there and which type of card could be best for you, but before I do, ask yourself a few questions.
First, do you find yourself in a situation similar to where I was with my first card? If so, this article is something you should read once you get your financial life in order. Otherwise, you might see this as a license to sign up for all kinds of credit cards so you can get cool stuff for free.
If you’re having a difficult time, check out my article on using budgeting to get yourself out of debt. I’ll show you how you can adopt some really simple, everyday habits that my wife and I used to pay off $22,000 in credit card debt (about $12,000 of that was mine, spread across several different cards).
As I mentioned earlier, most credit cards fall under one of five categories. I’m going to talk about each category in terms of what they are, a few popular cards in the category and tips.
Travel Credit Cards
For a person who loves to travel, there’s nothing quite like the feeling of getting a free flight or a few hotel stays.
This is the big draw of credit cards that offer travel-related rewards. Sometimes those rewards come in the form of airline miles, while others come in the form of free hotel stays or points that can be put toward hotels, flights and/or rental cars.
The typical offer goes like this: the credit card is linked to travel-related brands like United, Delta, Hyatt or Marriot. They’ll offer you a huge reward for spending a certain amount of money within the first three months of owning your card.
For example, a few months ago the United MileagePlus Explorer card was offering 50,000 points if you spent at least $3,000 in the first three months. Another perk of the card was membership into their MileagePlus frequent flyer program, which includes:
- First checked bag for free
- Priority boarding
- Complimentary seat upgrades
On top of that, the offer had two free passes to the airline’s United Club, swanky airport lounges where you can get free drinks and snacks and, in some locations, showers.
These types of deals are also typical of hotel rewards cards. For example, we lived in the Tampa area for a time and loved going to the city’s Grand Hyatt hotel.
We loved it so much, in fact, that we joined Hyatt’s Gold Passport membership program, which meant we got special perks like upgrades and, in one case, a random free night.
We loved the program so much we signed up for the Hyatt Visa. Doing so got us Platinum status in their rewards program (even better upgrades!), as well as one free night a year on the anniversary of our membership.
Any purchases we made on the card counted as one point, but if we used the card on Hyatt-related purchases (restaurants, rooms, etc.), we got two and three times the points.
There’s a third type of card, however, that isn’t related to flights or hotels. A great example of this is the Chase Sapphire Preferred card. We signed up for it earlier this year because they were offering 50,000 free travel points if we made $4,000 in purchases within the first three months of having the card.
Those points could be transferred to several different kinds of travel programs, including United’s MileagePlus and Hyatt’s Gold Passport. You can also use the points in the Chase Ultimate Rewards program, a portal through which Chase customers can buy gift cards, travel and other perks.
The Sapphire Preferred is a favorite among travelers and travel-focused credit sites like The Points Guy, where writer Nick Ewen said, “It’s a terrific starter card but also a great product for experienced award travelers, so if it isn’t currently in your wallet, definitely consider making it your first application of the new year.”
Each one of the cards we’ve mentioned so far are popular travel cards, but we’d also like to throw the Capital One Venture card into the mix. Like the Sapphire Preferred, it offers points that you can put toward several different frequent flyer and hotel programs.
Tips for Using Travel Credit Cards
Many travel cards have a yearly fee, so make sure you know the cost before you sign up. The Capital One Venture will cost you $59 (waived the first year), while the Hyatt Visa will cost you $75 a year (also waived the first year).
You can look at this fee one of two ways: either you know you’re going to cash in on your rewards each year, or you want to get a free flight for a specific trip in the future.
We’ve done both. Our Hyatt card is in the first category. We get a free night each year, and during the year we rack up about 30,000 points. Our favorite hotel costs 12,000 points per night, so when you throw in the free night along with our yearly point totals, we’re getting three free nights that would normally total about $600.
Now, on the flip side of things, you could sign up for a frequent-flyer type card like the United MileagePlus Explorer. The card is $95 a year, but the fee is waived for the first year. You get 50,000 points, which is good for two round-trip flights in the United States.
We did a quick search of flights from New York (JFK) to San Francisco and found that you’d pay about $380 for a round-trip journey in October.
If you take that trip twice in your first year of owning your card, you’re saving around $760 (remember, there’s no annual fee the first year). And, if you use your two club passes ($108) and check one piece of luggage on each leg of the trip ($200 total), you’re looking at a savings of about $970.
However, you’ll need to keep in mind that getting these cards will require a credit check and will bring down the average age of your credit card accounts. Both of those factors can have an effect (although usually minor) on your credit score. These same rules apply to all credit cards I’m covering today, including our next category: cash back.
Cash Back Credit Cards
Cash back credit cards are based on a simple principle: you rack up small increments of free money each time you make a purchase, kind of like how travel credit cards give you points or miles on nearly any purchase you make.
However, cash-back cards can be kind of confusing because they like to split up your purchases into categories, and some categories get more rewards than others.
Here’s a good example of a card with fixed rewards in various categories:
- 3 percent back on gas
- 2 percent back on groceries
- 1 percent on everything else
…And here’s a good example of a card with one rewards percentage (5 percent at the time of our research) in rotating categories:
The Chase Freedom:
- Jan. – March: Groceries, movie theaters and Starbucks
- April – June: Restaurants; Bed, Bath & Beyond; H&M and Overstock.com
- July – Sept.: Gas stations, Kohl’s
- Oct. – Dec.: Amazon, Zappos, Audible and Diapers.com
Things can get pretty confusing when it comes to the rotating-category cards, but, thankfully, Chase sends out emails to its customers letting them know when a change is coming up.
Tips for Using Cash-Back Credit Cards
The Chase Freedom is a favorite among credit gurus, not only for the rewards you get but also because you can use your cash back in the Chase Ultimate Rewards program.
As The Simple Dollar’s Holly Johnson wrote, “No matter what kind of spender you are, the Chase Freedom card offers an easy way to rack up rewards without worrying about paying an annual fee. And since it’s connected to the lucrative Chase Ultimate Rewards program, it is a great card to pair with one of the top travel cards that earns Ultimate Rewards points.”
Another bit of advice: Some cash-back cards will offer you a cash bonus if you spend a certain amount in the first three months – the Freedom and Discover It have both offered these perks at one time or another. If you’re thinking about getting a card in this category, do your research first to find out who gives you the best deal.
Many times you’ll find these cash back cards will give you low introductory APR’s or amazing balance-transfer offers, which happen to be the next category of card I’m covering.
Low APR Credit Cards
Each category of credit card is geared toward a certain type of person.
Travel cards are great for people who want free hotel stays, one or two free flights or travel all the time and want to use the card to rack up miles. Cash-back cards are excellent for people who spend a lot of money on their cards each month and want their rewards in cold, hard cash.
The next category of cards, low APR, is excellent for those who are looking to make some big purchases or are carrying high-interest balances on other cards.
One of the best examples of a low APR card is the Chase Slate, which gives cardmembers (at the time of our research) 15 months of interest-free purchases and balance transfers.
This type of deal is what’s known as “same as cash”. Why? Because for the first 15 months of your membership, you aren’t charged any interest; it’s basically like using cash. But once the promo period is over, you’ll be charged interest on any purchases you don’t pay off at the end of the month.
Smart consumers will use these offers to transfer interest-laden balances from other cards. This is a great way to pay off your debt without throwing money away on interest. For example, if you’ve got $2,000 of debt on a card with a 20-percent interest rate, you can expect to pay about $33 a month in interest if your balance stays at $2,000.
Should it take you 12 months to pay off that card, you’ll fork over $224 in interest. If you transfer that $2,000 balance, however, to a low-APR card, you’ll pay no interest and a small fee of around 3 percent for the transaction ($60). Your savings? $164.
And better yet, the Chase Slate is unique in that it doesn’t charge you 3 percent for your balance transfers.
Credit.com writer Jason Steele said this one feature makes the Slate stand out from the crowd.
“This unique feature makes it one of the most valuable offers for those who are trying to eliminate their credit card debt,” Jason wrote.
We’ve also reviewed the Citi Simplicity, another solid low-APR card.
Tips for Using Low APR Cards
Your credit score plays a huge role in how long you get 0% APR on your purchases and balance transfers. So, if you’ve got a great credit score (750 and above), you’re pretty much guaranteed the full 15 months of same-as-cash rates. However, if your score dips into the 600’s, you might see 12 months (or lower) of interest-free purchases.
Also, remember that if you do a balance transfer, you need to have the entire balance paid off before your intro-APR period is over. If not, you’ll be charged interest on the original amount, not on the balance that’s left at 15 months.
For example, if you’ve put a $3,000 transfer on your card at 20 percent interest after 15 months, you will be charged $600 in interest if you don’t have the balance to $0 when your intro period is over. If you forgot when your 15 months is up, call your credit card company and they’ll tell you.
If the credit world had a snooty clique who was just too good for everyone else, it would be the luxury cards. The main thing that sets these cards apart from the rest is their annual fee, which is anywhere from $300 to $500. That fee, however, gets you access to VIP-level benefits like entry into high-level travel lounges, specialized concierge services and free promotional gifts from luxury brands.
The Sapphire Reserve is like the Sapphire Preferred but on some serious luxury steroids. Instead of 50,000 introductory miles, you get 100,000 along with a 50% boost when you use the points in the Ultimate Rewards portal.
On top of that, you get a statement credit of $100 to cover the cost of enrollment in the Global Entry program, which expedites the process of you getting through the airport as you check in for a flight. And while you’re waiting for your flight to take off, your card gets you free access to the global network of Priority Pass Select airport lounges.
Luxury Credit Card Tips
One thing to keep in mind is that you have to be a credit-score all-star and a big earner to snag these cards. While specific income requirements aren’t shared on luxury card websites, these exclusive cards are notorious for being very selective about who they accept.
So, if you got $495 to spare, don’t think you’re an automatic choice for the Sapphire Reserve or MasterCard Black; the same rules apply for the American Express Platinum, another luxury card with a high annual fee ($450).
If you’re looking for a “bargain” luxury, check out the MasterCard Titanium; it has a $195 annual fee.
The Bottom Line
If you can remember back to the beginning of my article, you’ll recall that I said I used my first credit card as a crutch. My goal wasn’t to rack up travel points or score cash back; I was using the card to pay bills I couldn’t pay after being laid off.
I’m definitely not alone in that scenario. Creditcards.com reported that one in four people with credit card debt were laid off or lost a job.
In situations like this, signing up for rewards cards isn’t a good idea unless you’ve got the income and financial discipline to spend only what you make and pay your credit card off in full, every month.
If you have the financial skill to handle a few credit cards, don’t be afraid to take advantage of travel, cash back, low-APR or luxury cards.
Many times you’ll find that travel cards will give you big bonuses that equal out to a couple of round-trip flights or free hotel nights. If you love a certain hotel chain or airline, these types of perks are perfect for you.
But let’s say you’ve got a sizeable budget each month and would rather use a cash-back card to make your purchases in lieu of a travel card. Options like the Chase Freedom or Discover It can put considerable chunks of change in your pocket when your rewards are cashed out.
Cards with low introductory APR’s are a great choice if you have to make a big purchase soon and want to spread out the payments over time instead of paying all at once (provided you pay off the balance before the promo period ends).
And, finally, there are the luxury cards. If you’ve got the income and the credit score to get one of these cards, they’re a great addition to your financial arsenal, especially if you travel and can take advantage of the perks we mentioned earlier.
All in all, the important thing is to remember that disciplined spenders can make their credit cards work for them: free flights/hotel stays, cash back and 0% purchases/balance transfers can save you hundreds, if not thousands of dollars.
If you like the idea of making credit cards work for you but you’re not familiar with credit scores and how they work, check out our series on credit scores:
- Credit Scores 101: A Comprehensive Beginner’s Guide
- How to Get and Keep a Good Credit Score
- How to Repair Your Bad Credit and Raise Your Score: Step-by-Step Guide