Types of credit cards explained

Most credit cards work in the same way, helping you pay for different products and services in your life, but you may not realize that there are different types of credit cards available.  Most credit cards are designed with a specific user in mind. If you're looking for a new card, make sure you understand how the different types of credit cards work, so you can narrow down your choices.

Many credit cards earn rewards (such as points) if you make purchases when you use them.  Once you've accumulated enough reward points, you can redeem those points to offset some of your travel expenses. In addition, many such travel reward credit cards come with travel perks included with them for no additional fees, such as trip cancellation or trip interruption insurance, airport lounge access and for some Scotiabank travel credit cards, no foreign transaction fees (exchange rate still applies).*

You may want to find a card that works for the type of traveler you are and how you vacation. Some travel credit cards are tied to a specific loyalty program for a hotel or airline, for example, which may limit your redemption options. On the other hand, there are travel credit cards that earn you points that can be used for any type of travel. 

With some travel cards, like those from Scotiabank, you earn Scene+ points on purchases and you are able to use your points towards travel expenses but also for everyday things such as your favourite gift cards, dining, entertainment and points for credit.

Cash back credit cards are popular because they're generally easier to understand. Whenever you make a purchase, you'll get a percentage of the amount you purchase back in the form of a cash back (like money) on your card. Most cash back credit cards will give you an accelerated earn rate on specific categories of spending such as grocery and gas purchases. While other purchases would give you a base earn rate.

If you're going to go with a cash back credit card, you should consider choosing a card that gives you an increased earn rate on specific categories where you do most of your everyday spending, so you can maximize your cash back potential. 

Anyone that carries a balance on their credit cards, rather than paying the entire balance off in full each month by their payment due date, should consider a low interest credit card. 

Credit cards typically have an interest rate that ranges from 19.95% or more on purchases.  

Whereas interest rates on low interest rate credit cards usually can range between 8 – 16.99%. When it comes to debt repayment, that difference in the interest rate can make a big difference in interest savings.

As an added bonus, you could consider using your lower interest rate credit card for a balance transfer. Balance transfers are attractive since you can transfer (port) an existing balance from a higher interest credit card to your low interest credit card. There may even be a promotional period on your lower interest rate credit card or you may be offered such a promotional balance transfer rate offer, where you'll get an even lower interest rate for a set period of time – a 0% interest rate for 6 months - when making a balance transfer. Once your promotional period ends, you'll pay the regular low interest rate.   

You should read the terms of any balance transfer offer carefully before you use this method for debt payment because, there may be conditions to keeping your lower rate promotional offer (ex. paying on time, or like most credit cards, if you have a balance transfer on your card and make further purchases on it, you will have to pay the entire balance in full that month to avoid interest on those new purchase – if you are using a lower interest rate card for purposes of debt repayment, you may want to consider another payment method for new purchases). 

Anyone who's looking to build or improve their credit history (including those new to Canada) or has bad credit should take a look at a secured credit card. With secured credit cards, you have to put down a deposit as security for the card.  Most financial institutions will make the security equal to the credit limit plus a % set by them. For example, if the security is to be 120, if your credit limit is $500 then you would be required to have cash security of $600.

The deposit to secure your card is required by the credit card issuer so they have security in case you aren’t able to pay the credit card. Although you won't be able to use your deposit to pay down your balance, you'd get it back if you close your account in good standing or you are approved by the lender to have the security released and maintain the credit card on an unsecured basis.

As you make your payments on time , your credit score should slowly improve.  Eventually, if your score improves enough, you could apply for an unsecured card or other credit (or as noted above, ask for the security deposit to be released back to you). 

Secured credit cards may not give you many extra benefits like a travel rewards card may, but that shouldn't matter, as building credit is typically more important for people considering this type of credit card.

Whether you're a small business owner or work on a business on the side, getting a business card may help you in a few different ways. Generally speaking, business credit cards typically have a higher limit than personal cards. In addition, some business credit cards have an extended interest-free period, so you can manage your cash flow better.

What's also great about business cards is that you usually have options for the type of card you want. For example, you may be able to choose a small business card with travel, cash back, or other reward options.  

Many major retailers offer their own credit cards. They can be appealing as you can often get an immediate discount when you are approved for the card. In addition, you could earn extra points or cash back when shopping at the store using their store card. Some store credit cards will even give you specific merchant benefits such as no receipt returns and personalized returns, but it's unlikely that you'll get much more. 

However, while these additional features and benefits may seem appealing, if the credit card can be used outside of the retailer location (and not all of them can be), you generally don’t receive any additional benefits for purchases.  And in most cases, the interest rate on these types of credit cards are much higher than non-store credit cards.

With hundreds of credit cards on the market, it can be hard to choose just one. To find the best credit card for you, figure out what features and benefits of a credit card matter to you most. From there, you should look at the fine details carefully including the rates and fees of the card before you apply.