What credit cards do and why the type matters
A credit card lets you borrow money from a bank or card issuer to pay for things now and repay later. The card issuer charges you interest on the balance you carry, and may charge annual fees, late fees, or other charges depending on the card. Different cards are built for different situations — a card that rewards travel spending is not the same as a card designed for someone rebuilding credit, and choosing the wrong one costs you money over time.
The main categories are rewards cards (which give you cash back or points), low-interest cards (which charge less interest if you carry a balance), cards for building or rebuilding credit, and cards with no annual fee. Within each category, the terms vary widely. Understanding what each type does and what it costs you is the first step to picking one that matches how you actually use credit.
Key Takeaways
- Rewards cards make sense only if you pay the full balance each month — the interest you pay on a carried balance will erase any rewards you earn.
- Low-interest and balance-transfer cards charge less interest but often have higher annual fees, so compare the total cost over the time you plan to carry a balance.
- Cards for building credit report to all three credit bureaus and help you establish a credit history, but usually charge annual fees and offer no rewards.
- No-annual-fee cards are useful as a backup card or for someone who uses credit rarely, but typically offer no rewards and charge standard interest rates.
- Your credit score, income, and how you plan to use the card all affect which type will cost you the least money over time.
Rewards cards: cash back, points, and travel benefits
Rewards cards return a percentage of what you spend as cash back, points, or airline miles. The percentage varies by card and by category — some cards give 2% cash back on all purchases, while others give 5% on groceries and gas but 1% on everything else. A few cards offer points that you can redeem for travel, merchandise, or statement credits.
The catch is that rewards cards almost always charge a higher interest rate than other cards, and many charge an annual fee. If you carry a balance from month to month, the interest you pay will quickly exceed the rewards you earn. A rewards card only saves you money if you pay the full statement balance every month. If you sometimes carry a balance, a low-interest card will cost you less overall.
Rewards cards also vary in how straightforward it is to use the rewards. Some let you redeem for cash when ready. Others require you to accumulate points until you reach a minimum redemption amount, or they expire if you do not use them within a certain time. Read the redemption rules before you sign up.
Low-interest and balance-transfer cards
A low-interest card charges a lower ongoing interest rate than a standard card — sometimes 0% for a set period (usually 6 to 21 months), then a higher rate after that. A balance-transfer card lets you move debt from another card to the new card at a low or 0% rate for a promotional period. These cards are useful if you are carrying a balance and want to reduce the interest you pay while you work it down.
The trade-off is cost upfront. Low-interest cards often charge annual fees of $95 to $495, and balance-transfer cards usually charge a one-time fee of 3% to 5% of the amount you transfer. If you are transferring $5,000 at 3%, you pay $150 just to move the debt. Calculate whether the interest you save over the promotional period is larger than the fees you pay. If you plan to pay off the balance before the promotional period ends, the math usually works. If you will still owe money when the rate jumps, the card may not save you money.
Also check what the interest rate will be after the promotional period ends. Some cards jump to 20% or higher, which is not much better than a standard card. The best low-interest cards have a reasonable ongoing rate, not just a good introductory offer.
Cards for building or rebuilding credit
If you have no credit history or a damaged credit score, a standard card issuer will likely deny you. Cards designed for building credit are built for this situation. They report your payment history to all three credit bureaus (Equifax, Experian, and TransUnion), which helps you build a credit score from scratch or recover from past damage.
These cards usually require a cash deposit equal to your credit limit — if you deposit $500, your limit is $500. The deposit stays in a savings account while you use the card. After 6 to 24 months of on-time payments, the issuer may convert the card to a standard card and return your deposit, or raise your limit without requiring more deposit. Some issuers offer this automatically; others require you to request it.
The downside is cost. Most cards for building credit charge annual fees of $25 to $95, and they offer no rewards. Interest rates are also typically higher than standard cards. If you are building credit, expect to pay for the privilege. The goal is to use the card responsibly for a year or two, then move to a better card once your score improves.
No-annual-fee cards and when they make sense
A no-annual-fee card charges no yearly fee and offers no rewards — you straightforward get a card with a standard interest rate. These cards are useful as a backup card you keep in a drawer, or for someone who uses credit rarely and does not want to pay for a card they barely use.
The interest rate on a no-annual-fee card is usually in the standard range, often 18% to 24% depending on your credit score. If you plan to carry a balance, this card will cost you more in interest than a low-interest card would, even after accounting for the low-interest card's annual fee. Use a no-annual-fee card only if you plan to pay the balance in full each month, or if you need a card you will use infrequently.
How your credit score affects which cards you can get
Card issuers set minimum credit score requirements, and the better the card's terms, the higher the score they require. A rewards card might require a score of 670 or higher. A low-interest card might require 700 or higher. A card for building credit has no score requirement because it is designed for people with no score or a very low one.
If your score is below 620, you will likely only be approved for a card designed for building credit. If your score is between 620 and 669, you may be approved for some no-annual-fee or building-credit cards, but not rewards or low-interest cards. If your score is 670 or higher, you have access to most card types, though the specific terms depend on your score and income.
Your score also affects the interest rate you are offered. Two people approved for the same card may receive different rates based on their credit score and history. A higher score usually means a lower rate.
Comparing cards: what to look at side by side
When you are deciding between specific cards, compare these numbers: annual fee, interest rate (called the APR or annual percentage rate), rewards rate or cash back percentage, and any promotional offers. If you plan to carry a balance, also calculate the total cost of interest over the time you expect to pay it off, then subtract any rewards or cash back you will earn. The card with the lowest total cost is the one to choose.
Do not choose based on rewards alone. A card that offers 5% cash back but charges a $95 annual fee and 22% interest is not a good deal if you carry a balance. Do not choose based on a promotional offer alone either — a 0% balance-transfer rate for 12 months sounds good until you realize the ongoing rate is 26%. Read the full terms, not just the headline offer.
Also consider how you actually use credit. If you spend most of your money on groceries and gas, a card that gives 5% back on those categories will save you more than a card that gives 2% on everything. If you travel frequently, a travel rewards card might be worth the annual fee. If you rarely use credit, a no-annual-fee card is the right choice even if it offers no rewards.
Frequently Asked Questions
What is the difference between APR and interest rate?
APR stands for annual percentage rate. It is the interest rate you pay on a balance, expressed as a yearly percentage. If a card has an APR of 18%, you pay 18% per year on any balance you carry. The terms are used interchangeably — when a card issuer lists an interest rate, they are showing you the APR.
Can I have more than one credit card?
Yes. Many people have multiple cards — one for rewards, one as a backup, one for a specific purpose like travel. Having multiple cards can actually help your credit score if you keep the balances low, because it lowers your overall credit utilization ratio. However, each card you open triggers a hard inquiry on your credit report, which temporarily lowers your score by a few points.
What happens if I miss a payment?
Missing a payment triggers a late fee (usually $25 to $40 for the first miss), and your interest rate may jump to a penalty rate of 25% or higher. The missed payment also reports to the credit bureaus and damages your credit score. If you miss a payment by 30 days or more, it appears on your credit report and stays there for seven years.
Should I close a credit card I am not using?
Closing a card can hurt your credit score because it lowers your total available credit and raises your credit utilization ratio on your remaining cards. If the card has no annual fee, it is usually better to keep it open and unused. If it charges an annual fee you do not want to pay, closing it is reasonable — the score damage is temporary.
How do I know if a card is right for me?
Match the card type to your situation: use a rewards card only if you pay the full balance monthly; use a low-interest card if you will carry a balance for several months; use a building-credit card if your score is under 620; use a no-annual-fee card if you use credit rarely. Then compare the specific terms of cards in that category and pick the one with the lowest total cost for how you plan to use it.