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The different types of credit card: which one is right for you?

A simple guide to the different categories of credit card, so you can find the one that's right for you.

Image by Matthew Kalapuch on Unsplash

Looking for a credit card?

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Credit cards can be a fantastic money management tool, but with so many different kinds of card it can be tricky to work out which one best meets your needs.

That’s why we’ve broken down the various types of card on the market today, and highlighted what you need to consider before applying.

As the name suggests, these cards do not charge any interest on the money you spend on the card for a set period. The idea is that you can make a big purchase, or a host of purchases within a short period, and then take your time paying off that outstanding balance without having to worry about interest charges ramping up that debt.

0% purchase cards are really popular if you need to cover the cost of a new kitchen, a wedding or some other big expense.

The length of the 0% period you’ll qualify for will vary depending on how good your credit score is, while it’s also really important that you work out how much you’ll need to pay off each month in order to clear that balance before interest charges kick in again.

With balance transfer cards, you can transfer your outstanding balance from your existing card onto the balance transfer card. You then enjoy a 0% interest period on that transferred balance, allowing you to pay it off faster.

0% balance transfer cards are ideal for people who want to pay off their credit card bill faster and pay less interest. To work out how much you could save, try our balance transfer calculator.

One key difference with these cards is that you’ll have to pay a transfer fee, which is generally calculated as a percentage of the balance you’re transferring. So a 3% fee on a £1,000 transfer means a fee of £30, for example.

Again, the better your credit score, the longer the 0% deals you’ll be able to get your hands on. Ensuring that you clear the balance entirely before the 0% period ends, and you start getting charged interest, is a really good idea too.

If you don’t need long in order to pay off the balance, then look out for one of the balance transfer cards that don’t charge a transfer fee. You’ll get a shorter 0% period, but the lack of a fee means you may save money overall.

A cashback credit card rewards you every time you spend on your card with cold, hard cash.

You get a percentage of your spending back in the form of cashback, which is usually paid annually. These cards often offer a boosted cashback rate in the first couple of months of card ownership, so if you have some big spending in prospect - Christmas for example - then a cashback card may be a good option to consider.

Cashback cards may charge an annual fee, so it’s worth including that fee in your calculations to ensure that it’s actually worthwhile getting one.

Cashback cards are great if you put all of your usual spending on them in order to maximise the returns, but it’s important that you don’t get carried away and spend more than usual simply because of the cashback on offer.

It’s also really important that you pay the balance off in full each month. Cashback cards often have quite large interest rates, and those charges will quickly erode the value of any cashback you build up.

Loyalty cards work rather like cashback cards in that you get something back in return for using them for your spending. However, the rewards in question are loyalty points for schemes like Clubcard and Nectar.

These cards often boast an interest-free period to boot so you can spread your payments as well as earn loyalty points based on your spending.

Loyalty credit cards are best for people that already use loyalty schemes. If you always do your grocery shopping in Tesco, then a Clubcard credit card can offer your points tally a real boost.

But if you tend to switch between supermarkets or don’t care for loyalty schemes, these cards won’t appeal.

Another form of credit card is an airmile credit card. Here the rewards on offer when you spend will be airmiles, though the card provider will likely call them something different, based on the scheme they are partnered with.

So for example British Airways cards will reward you with Avios on your spending, while Virgin Atlantic cards provide Flying Miles. These miles can then be used to cut the cost of your next holiday, from flights to hotel stays. You can even cash them in for things like cheaper car rental.

Airmile credit cards are ideal for people who spend a lot on their credit card and pay if off in full every month.

As with loyalty and cashback cards, it’s very important that you pay the balance off in full each month with airmile cards, or else the interest charges will undermine the value of the miles you build up.

These cards may charge an annual fee too, so take those into account when working out whether they are actually worth going for.

While you’re on your holidays, you might want to put your overseas spending on a credit card too. Doing so on a traditional credit card can prove extremely expensive as a result of the additional fees and charges.

Travel credit cards are designed for frequent travellers, and come with no fees on non-sterling transactions.

Some will even waive the fee should you opt to make a withdrawal on the card.

Of course, if you don’t tend to spend much time abroad then you might be better off sticking to cash or prepaid cards when it comes to your holiday money.

It’s not exactly a secret that further education can be incredibly expensive, and those costs stretch beyond simply paying for your course. As a result, many students opt for the safety net provided by a student credit card.

Student credit cards tend to come with much more strict credit limits than mainstream credit cards, typically of up to £1,000, while the interest charged on your balance may be higher than that on offer from other cards.

However, they are a good way to get familiar with handling credit and offer you the chance to build a decent credit record from a young age. What’s more, some card providers will increase your credit limit over time, once you show you are a responsible borrower.

Credit builder cards are designed for borrowers who either have very little credit history, or who have a patchy record that they want to improve.

Borrowers will only get a fairly small credit limit to work with, while interest rates are likely to be a bit higher on these cards than the best deals. However, they are generally easy to get and so long as you make your repayments on time they can be a great tool for building a better looking credit score, allowing you to qualify for much better deals in future.

Some even come with additional perks, like small rates of cashback on your spending or 0% interest periods.

While there are clearly a lot of different types of credit cards, having one of each is not a great idea for the sake of your credit record.

So how many credit cards should you have? While there’s no one-size-fits-all answer, we have looked at how to work out the right number for your own situation.

It’s also really important that you understand precisely what you are signing up for when applying for a card. For more, check out our piece on the terms and conditions to look at when considering a card.

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John Fitzsimons is a freelance financial journalist who has been writing about money for more than a decade, appearing in the likes of the Sunday Times, the Mirror, the Sun and Forbes.