With the various types of credit card options available, it may be a challenge to understand the possibilities. To help you get the lay of the land, here is a quick overview of the different types of credit cards and credit card brands.
Credit Card Brands
Many people think of credit cards as either a Visa card or MasterCard. However, Visa and MasterCard International are actually brand names, derived from the names of the two companies that offer the Visa and MasterCard brand respectively.
There are basically four main types of credit card brands: Visa, MasterCard, American Express, and Discover Card.
Visa and MasterCard — Visa Inc. and MasterCard International don’t offer credit cards directly to consumers. Instead, they enable banks, such as Citi, JP Morgan Chase, Bank of America, HSBC, Advanta, and Capital One, to offer the Visa or MasterCard credit card brand to their customers. Visa and MasterCard International, in turn, are in charge of processing the payment whenever you make a purchase with your credit card.
American Express and Discover Card are two other well-known credit cards brands. These cards are issued directly to consumers by their parent companies, the financial services company American Express and Discover Financial Services, a business unit of Morgan Stanley.
Originally targeted to primarily affluent consumers, American Express in recent years has broadened its market reach by making its credit card offerings more widely available. Discover Card created its unique credit card brand by pioneering the first cash back credit cards and is now the third largest credit card brand in the United States.
The Main Types of Credit Cards
Credit cards with a revolving line of credit — This is by far the most common type of credit card. It offers convenient access to a line of credit from which you can draw money each month to pay for purchases or take out a cash advance.
You simply pay off a portion of your charges every month, and as long as you keep current on your minimum payment, you can carry your balance forward as long as you want to. You do, of course, pay interest on the unpaid portion of your charges.
This type of credit card comes in numerous variations, ranging from business credit cards to consumer-oriented cash back and rewards credit cards, student credit cards, and various affinity credit cards centered around specific interests, such as entertainment, charity, sports, home improvement, and so on.
Charge cards — A charge card is different from a credit card in that it requires you to pay off the card balance in full every month. While a revolving credit card gives you access to long-term credit, a charge card gives you only a very short-term loan, usually one month. You don’t pay any interest since you pay off your balance in full at the end of each month. However, if your payment is late, or if you just make a partial payment, you typically pay a penalty fees.
This type of card was mainly pioneered by American Express. To be more competitive with credit cards offering revolving credit, American Express now also offers various credit cards as well as charge cards.
Prepaid Credit Cards — This is one of the main two types of credit cards available for people with no credit history or with poor credit. When you open a prepaid credit card account, you deposit money into an account. You then get issued a credit card, which you can use as you would a regular credit card—as long as there is money in your account.
A prepaid credit card, in short, uses the same principle as a debit card linked to your savings or checking account. Its distinguishing feature is that it doesn’t give you access to a line of credit It simply offers the convenience of having a credit card for online purchases, car rentals, and other types of transactions that are hard to make without a credit card.
Unsecured Credit Cards — Similar to Prepaid Credit cards, this type of card targets people with poor credit or no previous credit history. An unsecured credit card basically functions like a standard credit card with a revolving credit line. However, there are some important differences that put unsecured credit cards into a category of their own.
Firstly, the initial credit line will be very low, commonly around $300. Secondly, you will be charged higher fees, not just on any outstanding balance, but also fees to open and maintain your account.
In short, an unsecured credit card doesn’t offer access to a lot of credit, but rather gives you a way to rebuild your credit. If you use the card responsibly, your credit score will improve faster than it otherwise would. To learn more about this type of credit card, read through our selection of articles about Credit Cards for People with Bad Credit.