Types of Credit Cards

Just as the old saying goes, there is no free lunch in this world. But there are freebies attached to credit cards – including perks like no annual fee or yearly membership. These so-called free credit card deals may not be completely free of charges – such as interest you still have to pay on any balances you carry forward from month to month – but when it comes to owning a credit card one with no annual fee is as close to a free credit card as it gets. Pair that free yearly membership with a competitive interest rate – or a low or zero introductory rate deal – and you have a formula for a really attractive credit card.

Keep in mind that some cards that do charge an annual fee may have other benefits that can help to justify the cost of your yearly membership. Many rewards card, for example, like those that are connected to an airline frequent flier program may carry an annual fee. But if your rewards outweigh the cost of enrollment, then it may be worth it to you. Otherwise you will want to search out cards that are really and truly free credit cards with no annual fee – because unless you are getting some special perks there is no reason why you should have to pay for the privilege of carrying plastic around in your wallet.

Study the small print whenever you get a free credit card offer to determine whether it is a permanent offer or one that has an expiration date. Many cards will start you off for free, for instance, but maybe after the first year you will start to be charged an annual fee. Others will charge a one-time enrollment fee when you first get the card, a practice that is common with cards offered to people who have poor credit.

But if you have decent credit and plan to hold on to your card and rely on it for years to come, you might be better to keep shopping around. There are literally hundreds – if not thousands – of great credit cards that never charge any enrollment fee or yearly membership at all while the still offer great rates and benefits.

Teaching your son or daughter how to manage money is an increasingly important aspect of good parenting, and if you choose the right kind of credit card you can get some help from your card company. That’s because many credit card issuers offer special products in the form of credit cards that have built-in parental controls.
 
You get the peace of mind and confidence of knowing that you child will not be able to misuse or abuse the card – which could destroy your own credit rating and create havoc. You also get help teaching your kids how to use a credit card in the grown-up world of modern finance and commerce. They can learn safely and securely, because even if they accidentally slip up and make an innocent mistake – like going over their spending limit – the automatic card controls will kick in and save the day.

These cards put the son or daughter on your own credit card account as another card user or cardholder, which makes it easy for them to get a card even if they are still too young to have a credit history or good credit score. But since you are being exposed to liability by having them on your account, the credit card features also offer various types of protection. You can set the limit for how much the kid is able to withdraw at one time, for example, from an ATM machine. If they go to the ATM and your imposed limit is $25 per day and they try to withdraw more than that, the transaction will be blocked.
 
But you can also sign up for e-mail alerts, which are super-cool. Let’s say your child has a spending limit of $100 but they try to get access to $150. You will get an email within 24 hours telling you all about it. If they try to use the credit card in designated places that are inappropriate, you can also get notifications about that kind of behavior. Your son who is 17 tries to use the card to rent a car, a hotel room, or pay to get into a place where only adults are allowed and not only is his card usage stopped but you get notified. Your daughter tries to use the credit card in a restaurant to buy alcohol – even though she is under age – and you find out with a convenient e-mail. The features vary from card to card, and you can choose among those that offered to set your own menu of preferences.

So instead of being afraid to let your child have a credit card, take advantage of these great features to train your child to be a more responsible and savvy consumer. It is a lesson that will reward them for the rest of their lives.

Many people run a business and use checks to pay most of their business expenses. When they need to use a credit card instead of writing a business check – like when they rent a car or place an order for supplies over the Internet – they just pull out their own personal credit card and use it, reimbursing themselves later from the business bank account. But when it comes to paying business taxes – which can be expensive and complicated to keep track of for IRS or state filing purposes – a business credit card offers one significant perk that is so handy it may convince you to get one and start using it.

When you use a credit card for business and then pay interest on the credit card balance, that interest is usually tax deductible. That is not true with normal interest you pay on personal credit cards, and with interest payments as high as 20 percent or more on many credit cards, the tax deduction perks are really substantial. The reason it is important to get an exclusive designated business credit card is that you will have a completely separate billing statement and account – distinct from those tied to your personal credit card usage.

The IRS and your state tax office have stringent rules that prevent you from tacking on personal expenses to your tally of qualified business expenses. But if you use just one card for business, those deductable interest payments will be automatically separated for you each month. Most credit card companies will also send you a year-end summary of your year’s expenses – neatly tabulated into various expense categories like “travel,” “office supplies,” “meals,” “gasoline,” and so forth. That saves you lots of time and frustration at tax time, and it gives you a tidy document to use to prove that the tax deductions you claim are really and truly legitimate.

But the main perk is that you can deduct your interest payments. If you use your credit card like many businesses do – as a way to give yourself hassle-free loans and cash advances – then the amount of interest you pay to service that credit card debt could be huge. Getting to write it off as the cost of doing business at tax time turns it from a negative into a big positive, though, and if you are missing out on that tax deduction you should seriously consider taking advantage of it with a business credit card.

Even if you were turned down for a credit card or have such bad credit that nobody will lend to you, it is still possible for you to get a valid credit card. That’s right, even if everyone has rejected your credit card applications the chances are extremely high that you can walk into your local bank and walk out with a brand new MasterCard or VISA Card that will work credit cards are accepted. Use it for groceries, to buy gas, to shop at the mall, to purchase souvenirs while on vacation, or to rent movies or pay for a fancy meal in your favorite gourmet restaurant.

The kind of card you want is a “collateralized” credit card, because it has collateral or actual cash to back it up in the event you fail to repay your balance. Ordinary credit cards, on the other hand, are not backed by anything but good faith – which is why lenders and credit card issuers will not grant you one unless they think you have a strong record of repaying your obligations. But if you get a collateralized credit card it will be tied to your checking or savings account in much the same way that an ATM card is connected to that kind of bank account.

Your bank will put a limit on how much you can spend based on how many dollars are held in your matching bank account. Put $500 in the credit card bank account, for example, and your bank will typically issue you a credit card with a $500 spending limit. As you spend money during the month, the limit shrinks – just as it does on a conventional credit card – and when you repay the card by paying off your outstanding balance then the limit goes back up. The major difference is that with money in the account to back up the credit card you are able to get a VISA or MasterCard when you would otherwise be totally refused and rejected.

The best feature of these unique credit cards, however, is that they give you a way to build up your credit rating. Once you get one and start using it responsibly, make sure your bank reports the account activity to the major credit rating services on a regular basis. Before long you will have good enough credit that you will be able to apply and get your own traditional style non-collateral credit card, even if you were rejected in the past.

Anyone who has ever accumulated enough frequent flier miles or free miles on an airline miles credit card understands the thrill of being able to take off and fly free of charge. But once you cash in your miles and take that trip, your balance falls back to zero again and the long process of building your mileage account back up starts over. That can be a real disappointment because for many of us – especially those who do not travel very often – it can take forever to earn enough miles to pay for a free trip.

But there is a quicker way, and an easier solution, for anyone who happens to own or manage a business. Enroll in a good airline reward program, apply for and get an airline miles card that has affordable terms and user-friendly features, and then try to charge every possible business expense you can by running the expenses through your credit card. If you work in an office that orders copier paper once a month, for instance, pay for it with your air miles credit card. Then use a business check to reimburse yourself so that you have the cash to pay off the credit card expense when the monthly statement arrives. The same strategy works in any business or profession – whether you work as an auto mechanic, own a restaurant, repair computers, or work in a doctor’s office.

Any time supplies, products, or additional inventory is ordered just get in the habit of paying for it with your air miles card instead of using a business check to pay the vendor or supplier directly. Reimburse with a business check so that the credit card can be paid off and also so that the business can document its expenses for tax deduction purposes – which are also extremely valuable. But because businesses normally incur many more dollars in expenses each month compared to what you might spend by yourself with your credit card, you’ll rack up free travel miles at an astonishing rate.

One particular landscaper who uses this strategy, for example, only makes about $30,000 a year. But because he buys lots of plants, mulch, and other items for his customers all year long as part of his landscaping business, his business spends $10,000 a month. Because he runs those expenses through his air miles card he earns about $100,000 worth of air miles each year, and that allows him to take free annual vacations to exotic destinations – even on a modest income.

In an article entitled “A Push to Regulate Prepaid Cards,” The Wall Street Journal (on 6/25/09) warned that prepaid reloadable cards—payment cards not tied to a traditional bank account—will not be covered by the new federal law designed to protect against fraud, ID theft, and losses from stolen cards. Also not covered: gift cards, wire transfers, checks, and securities/commodities transfers.

“Though many prepaid card companies do offer some consumer protections,” the article said, “they do so voluntarily.” A member of the federal government’s Consumer Advisory Council cautioned: “Cardholders’ inability to reject unauthorized charges makes it risky for them (to use the cards) to pay bills or make purchases online.”

However, the article continued, almost all prepaid cards are serviced by either Visa or MasterCard, “which offer holders zero liability and other protections against fraud.” But, usually, prepaid card issuers don’t send out monthly statements, so you won’t know if or when you’ve been a victim of fraud, or by whom.

As more people with credit problems turn from traditional credit cards to prepaid cards, and as activation and transaction fees decline, the use of prepaid cards has jumped dramatically—from less than $5 billion a year in 2003 to “somewhere between $39 billion and $113 billion” in 2007.

If so, you probably know the bad news already. As noted in The New York Times (6/19/09), “As of April, 59 percent of America’s small firms relied on credit cards to help finance their day-to-day operations, up from 44 percent at the end of last year, according to the National Small Business Association. The number of small business owners who depend on a credit card to buy everything from paper clips to heavy equipment has climbed steadily over the years....

“But credit card terms have worsened sharply with the recession: three-quarters of small business (owners surveyed) said they have seen a drastic cut in limits over the past six months” while banks and other lenders have also pulled back significantly. In addition, the new federal legislation to reduce credit card abuse, effective next year, does not cover small businesses, which—the credit card industry claims—account for even more delinquencies and charge-offs than individual cardholders. So they’ve had to reduce their risk. One card issuer, Advanta, originally formed to offer credit cards exclusively to small businesses, recently cancelled new credit for its cardholders and/or increased the interest rate it charged.

If you run a small business and have not yet seen a reduction in the credit line on your credit card(s) or a dramatic jump in interest rates, be prepared; it could happen without warning. Therefore, you may want to: apply for other credit cards; consult with your accountant and a local banker; stop relying on credit cards to pay for supplies, inventory, payroll, etc.; reduce the amount of credit you extend to customers; offer a special discount to open-account customers who pay cash; ask your suppliers for more time to pay your bills.

Recently, everyone with an Advanta Business Card account received a notice that their account will be closed on May 30 (even if they always paid on time, used their card responsibly, and contributed their fair share, or more, to Advanta’s bottom line).

According to the notice, “The card is funded by an independent trust which owns the balance you owe on your account and provides funding for new transactions. ...The trust also restricts our flexibility to fund activity on your account. Unfortunately, as a result, effective May 30 all Advanta Business Credit Card accounts, including your account, will be closed....If you use your card to make automatic recurring bill payments, you will need to make alternative arrangements for those payments promptly.”




Of course—assuming you promptly open and read all your mail, even the fine print—you already know all this if you have an Advanta Business Card. But if you carry some other card, for business or personal use, it’s a warning: If you have a credit card, anything can happen, at any time, for any reason, without much notice. Especially now, with the U.S. government finally taking action to reduce some of the credit card industry’s one-sided, “take-it-or-leave-it” conditions and actions.

It’s also a reminder to pay attention to any automatic recurring bill payments you may have, such as subscriptions to online membership programs, that you no longer need, want or can afford. You may want to cancel them, if possible. You may also want to have accounts with more than one credit card issuer, to provide a little protection in case the issuer you’re with decides to close your account.

If your credit record and payment record are good enough for you to have a credit card with an interest rate below 10%, congratulations!

However, we take it back if your credit card is issued by Bank of America.

BofA just announced that, beginning in June, cardholders who carry a balance and have an interest rate below 10% will see their rate jump to double digits. Similar rate increases were announced earlier by several other banks.

The Wall Street Journal found a woman in Vermont who received a notice from BofA that her 7.9% rate will increase to nearly 13%.

(Card issuers like to offer rates such as 7.9% and 12.9%, rather than an even 8% or 13%, because they think they’re fooling the public. They’re like car-makers who advertise a price of, say, $39,999, so dummies will think it’s under $40,000.)

According to the Journal, the woman called the bank and opted out of the change. So she can keep the 7.9% on her roughly $2,000 balance until she pays it off, which will be years from now if she pays only the minimum due each month. However, if she uses her card for any new purchases—even if only for a few bucks—the higher rate will apply to her entire balance.

Of course, another option would be to pay off the entire balance now, keep the card (to help keep her credit score up), and then use the card and pay the balance in full each month, so she wouldn’t have any finance charges at all.

But card issuers don’t like those kind of customers, so she’d probably be hit with a monthly fee, or perhaps they’d simply close her account.

When should children have their own credit card?

When they’re old enough to use one responsibly, and when they need to have one because they’re attending college (or working or traveling) many miles from home and would not otherwise have access to the funds they need.

If your child is not legally old enough to have a card in his/her own name, you’ll have to co-sign for a card. So keep the credit limit low enough to avoid financial meltdown. And watch out for attempts by the card issuer to raise the credit limit. It’s best if the statements come to you each month, rather than to your child, so you can more easily keep track of how it’s being used (and so you can make the payments on time). But send a copy to your child. You can also sign up for online statements.

You may want to read the recently-published The Everything Personal Finance in Your 40s and 50s Book, which includes this advice on kids and credit cards:

“Sit down with your child and explain how to read the credit card statement online and in hard copy. Decide what charges will go on the card. Focus on using the card for convenience—e.g., to charge DVD rentals or order merchandise online—and insist that the balance be paid off each month.”

When your child is old enough to have a card of his/her own, close the one you co-signed, the book advises, but still have the statements come to you.

Also warn your child about letting anyone else use the card, even once.