Credit Cards – Types and Basics

When the time comes for a bigger purchase and you need a credit card, there can be some questions that come with it. What type should I look for? What interest rate should I pay? Will I have access to the best rates? Caleb Silver, Editor-in-Chief at Investopedia joins Cassidy Clement, IBKR’s Senior Manager of SEO and Content to discuss.

Summary – Cents of Security Podcasts Ep. 39

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Cassidy Clement 

Welcome back to the Cents of Security podcast. I’m Cassidy Clement, Senior Manager of SEO and Content at Interactive Brokers. Today, I’m your host for our podcast. Our guest is Caleb Silver. He is the Editor-In-Chief of Investopedia and the host of The Express podcast. 

When the time comes for a bigger purchase and you need a credit card, there can be some questions that come with that. What type should I look for? What interest rate should I pay? Will I even have access to the best rates? We’re going to discuss all of that and more in today’s podcast. Welcome to the program, Caleb. 

Caleb Silver 

Thanks for having me. 

Cassidy Clement 

Sure. So before we get started, since this is your first episode with us, why don’t you tell our listeners a little bit about your background in the industry? 

Caleb Silver 

Yeah, I am a business journalist. I’ve been in business journalism since the late 1990s, believe it or not. I worked at Bloomberg for many years as a TV producer. I also worked at CNN and CNN Money. I ran CNN’s Business News operations for several years and I’ve been at Investopedia for over 8 years. 

Cassidy Clement 

That’s awesome. So when we kick off this credit card chat here, what in a basic sense is a credit card and what would you need to get one of them? 

Caleb Silver 

A credit card, in physical terms, is a plastic or metal card. You see them in your wallet, you see them all the time, but it allows you to borrow funds to pay for goods and services with merchants or businesses or individuals that accept the card on the condition that you pay back those borrowed funds in a set amount of time.  

Usually that’s within a month or 21-day period. Or if you don’t, you’re going to have interest payments assessed on top of those and potential charges, but basically it allows you to borrow using a line of credit from the credit card issuer to make those purchases and pay them back later. 

Cassidy Clement 

Our listeners probably have heard many different commercials or seen many ads on the Internet, or if you’re still looking at a physical newspaper, maybe there for different types of credit cards that are out there.  

There may be rewards, cash back, travel, business cards, student cards, if you’re just starting school. What types of credit cards are out there? And if you can break them down a little bit so that we can kind of categorize what each of these are and how they differ. 

Caleb Silver 

Yeah, there are so many. And you mentioned a couple of them. So let’s tick down that list a little bit. Business credit cards, these are issued to businesses, small and large. If they need to make purchases for the running of the business. Let’s say you need supplies, let’s say you’re running a bakery, maybe you might use your business credit card to pay for your supplies ahead of time and then make your sales and then pay that back. That’s very common in small businesses.  

There’s also store-issued credit cards. Stores-issued credit cards are issued by department stores that give you credit access to that store to make purchases and pay them back over time.  

There’s also what we call secured credit cards. These are credit cards where you actually put the money up front. And then you use that credit card to spend the money you put up front. A little less common, but available to people.  

There’s also travel credit cards. These are just basic credit cards, but they give you travel rewards. You may have seen these in the airport or on your airplane the last time you took a flight. You earn airline points to be able to buy tickets or get tickets for free essentially based upon your rewards, which is based on how much you spend.  

There’s also balance transfer credit cards. If you’re holding balances of one or several cards, you may get an offer for a balance transfer credit card with a low APR or approved interest rate that’s very low so you can transfer your balances over. You’ve probably heard about those.  

And then there are the cash back credit cards. When you make purchases using your credit card, you actually get cash back into your account to use for additional purposes.  

And then there’s the student credit cards. Usually you see these set up on college campuses where you’re checking in freshman year. They offer credit cards with typically low credit limits, in that they don’t let you have that big of a credit line to overspend. But this is a lot of a lot of times an introductory credit card for students in high school or college. So those are just some of them. But those are the main ones that you see out there in the marketplace today. 

Cassidy Clement 

When it comes to those who are just starting to build their credit, are there certain kinds of “credit building” cards other than that student card? Could your parent or guardian be a consigner? 

Caleb Silver 

Sure, absolutely. You can get a cosigner or a custodian, which could be a parent or a guardian that you share a credit card with. And if your name is on it, along with your Social Security number and all the particulars that credit card companies ask for, it helps you establish credit.  

And the whole purpose, besides being able to make purchases and pay for them later with a credit card, is to build your credit history. And your credit rating because as you move on through life stages if you potentially want to buy a house or a car, and you’re going to put some money down and finance that purchase over time, you have to have a good credit rating.  

The higher your credit rating, the more you’re allowed to borrow. The more credit card companies trust you to borrow money and then pay it back. So, a way to start out is either with a custodian or a parent in a joint credit card or a student credit card or a cash back credit card for everyday purchases so that you’re earning a little bit of cash every time you make that purchase.  

That’s a good place to start for people just starting out with their first cards in the industry. 

Cassidy Clement 

Those are great points. The reason I asked is because I remember my student credit card. I mean, it was mainly for books and supplies, but it was my entryway into building credit. 

Because if you’re going into the world and you don’t really have any homes that you bought at 16 or 17, which most people don’t, you’ve got to start somewhere. So I wanted to touch on that a little bit about our real beginner listeners. But when it comes to these cards and specifically the word “credit”, how do you determine what amount of credit makes sense for you, how much you need? 

Caleb Silver 

Yeah. If you’re just starting out, if this is your first or second credit card and you don’t intend to make those big purchases, the home or the car, you don’t need a big credit line. And you’re probably not going to get one because you don’t have a credit history.  

So a credit limit of a couple of $1000 is not out of the question for an introductory card, maybe it’s $5000 you can borrow up to $5000 or 2500, whatever that limit is. But beyond that you are not allowed to borrow, and that’s a great place to start, because it forces you to pay off those purchases you make so that your credit limit can increase over time.  

The greater your credit history and the better your credit history, and that you’ve proven to be a good borrower who pays back those funds on time and is not assessed interest charges and other charges. The higher your credit limit goes and as you get older and you start making a little bit more money and proving that you’re a good credit card customer, you’ll see your credit limit increase. 

Cassidy Clement 

What happens if you try to spend over that credit limit generally? 

Caleb Silver 

No, you’ll get blocked right there at the merchant. You won’t be allowed to do it. Your credit card will be declined and that will be the reason you’ll get a notification, a text message or a message in the credit card app or on the website telling you that you’ve exceeded your credit limit and they are holding or they’re not allowing you to make that particular purchase. So you know right away when you hit that limit. 

Cassidy Clement 

So let’s flip this around. Let’s say you’re not using as much. What is the general percentage or we could say the sweet spot for utilization of the credit line that you’ve been extended? 

Caleb Silver 

There is something in the credit card industry called the Credit Utilization Rate and think of that like Goldilocks. You don’t want to be too cold, too hot; you want it to be just right. And that you are using your credit card. Credit card companies want you to use your credit card and you’re paying back your balances on time and you’re doing that at an increased rate overtime, but you’re not overspending, you’re not missing payments.  

A credit utilization rate should be just right so that you can make the purchases you need to get through the month, whether that’s groceries, some people pay their rent with their credit cards, some people will pay back some other bills with their credit cards. But you’re able to pay it back given the income you generate.  

You want your Credit Utilization Rate to remain in that sweet spot. And prove that you’re a good customer, worthy of more credit. Because as life goes on and you want to make those bigger purchases and you go into those life stages, you’re going to need more credit most likely because that’s just how we make purchases these days, especially the big ones. 

Cassidy Clement 

Yes, the big ones and most online shopping, which is how a lot of people buy anything these days. 

Caleb Silver 

Yeah. They don’t take cash online. 

Cassidy Clement 

Right. You’re not going to be sending a messenger pigeon to Amazon’s HQ to pay for the socks you just ordered so. 

Caleb Silver 

They may send a drone over to you and pick up your credit card, but you’re not going to be using carrier pigeon. 

Cassidy Clement 

Right. So, now that we’ve kind of established the ground rules of the spending, too much, spending too little spending, the right amount, give or take, how do the companies or the credit card companies or I guess in some cases the banks determine what amount of credit that they’ll extend to you in that credit line? 

Caleb Silver 

Sure, they will look at all of your financial information. So if you’ve ever applied for a credit card or you’re doing it for the first time, be ready to submit some information to the credit card issuer. They are going to want to know, hey, your Social Security number and then check out your tax information to see if you’re delinquent on taxes.  

You’re going to have to put your annual income, you’re going to have to put some bank statements in there to prove that you are a banking customer that has funds in the bank and based upon all of that information, how much you earn if you have a credit history, what your credit history is, what your credit rating is.  

And then, are you delinquent on any major bills, namely taxes? And that will determine your credit line, how much they are willing to extend to you at an introductory offer. Now, as time goes on, they may raise that credit limit, or they might lower it based on how much you’re using of that credit line.  

So that’s another thing to think about. You want to think of that as Goldilocks as well, you’re not allowed to overspend on your credit limit. But if you’re really not using it that much, then your Credit Utilization Rate is low and the bank or the credit card issuer is going to want to use that credit and extend it to other customers that are going to use it. 

Remember, credit card companies are in the business of making money by extending credit. This is how they do it. So they want to make sure that their customers are using the credit they’ve extended to them and that folks are paying back their credit card bills every single month. 

Cassidy Clement 

So if they take your credit score, let’s say into consideration, that’s usually how it goes. But I’ve read and done some research that some credit card issuers have predetermined credit limits, whether it’s like maybe we come out with a starter package and then I don’t know a premium and then a middle of the road.  

How exactly do things like that work for somebody who maybe is going for something lower, like let’s say like $500 credit limit and it’s a starter line or $200 or something like that? 

Caleb Silver 

The lower the credit limit, the easier it will be to attain that credit card because you don’t need to prove that you have a long credit history and good credit to be able to access that card. So usually with the cards that offer the lower limits, the introductory offers, you don’t need to have a very long financial history and that’s why you see students and young people using those more than other people.  

And then as time goes on and you prove again to be a good credit card customer and that you’re paying back your bills and you’re using your credit that they’ve extended to you, that will increase overtime.  

Or they may offer you new cards that have added incentives and that could be cash back, it could be travel rewards, it could be hotel points. As you start to use these more and more overtime in your professional career and your income hopefully is going up, you’re going to get a lot of offers for all different types of cards that allow you to do different things. But when you’re just starting out, you’re going to start with the basics and a very low credit limit. 

Cassidy Clement 

So we kind of discussed interest, rewards, purpose of these cards and maybe what your minimum payment they may set for you, but besides that, what are some things that listeners should keep in mind when selecting a card?  

I mean, I know minimum payments are a huge one that sometimes people forget about. You can’t just keep swiping the card, you have to pay it off at some point. But what are some things to keep in mind? 

Caleb Silver 

There’s a very key acronym that listeners need to keep in mind, and that is APR. That’s the Annual Percentage Rate and that usually has to do with the interest you will pay on your credit card or how much you borrow, if you do not pay it back in time.  

Now, as we’re speaking, credit card APRs are at an all-time high. They’re north of 23%. So those are very high if you don’t pay back your bill on time, you could get assessed an extra 23-24% on top of how much you borrowed, so that is very important for listeners to know. 

Look at that APR on the credit card offer and make sure that you can pay back your bills on time. Otherwise, that’s going to be assessed on top of your purchases. That’s something to keep in mind. Also, are you going to be using the rewards that your credit card offers?  

Now the important thing about having a credit card with rewards is that you actually use the rewards. You want to use those towards airline purchases, hotel stays, cash back. Sometimes there’s retailers or stores that offer you incentives as rewards to use that credit card. You have to use those or otherwise they’re going to start taking them away or sometimes they expire over time. So the APR and the usage of your rewards is very important.  

But also pay very close attention and not a lot of people like to do this to the fine print. And there is a lot of fine print when you get your credit cards. People just throw that out usually. Make sure you’re taking a good look at that so you know of any additional charges that might come up that you’re not aware of out of the gate.  

And also, potential rewards or incentives for using the cards for certain types of purchases. Credit cards are great for making the purchase, maybe at the grocery store and then paying it back within that 30-month time frame. But they’re also good for other incentives and you have to look through that fine print because there’s a lot of things you can find in there that could make things like travel a lot cheaper, renting a car a lot cheaper, applying it towards maybe an airport lounge, so keep a close look at the fine print. Look at it once, but look at it every single year when they send it to you because they will send it to you. 

Cassidy Clement 

All of those are really great points, especially, unfortunately, the fine print that ends up in most people’s trash can after you get the card in the mail.  

You mentioned the APR, like those interest payments and things like that. So just to give the general idea when the bill comes in every month of what you spent and what you owe, there’s usually a minimum payment, correct? If you just make the minimum payments, does that interest rate go up, or is it generally a flat rate? 

Caleb Silver 

The interest rate is generally a flat rate, but it does change over time. As the Federal Reserve changes interest rates, those APRs change over time. Well, if you had noticed, interest rates are at about a 21-year high right now, so the APR on credit cards is also very high. In fact, it’s at an all-time high.  

So if you just pay the minimum payment on your credit card, you’re going to get assessed those interest payments on top of what you still owe. That’s why you want to pay back your credit cards in full every month when you get that bill and before you get assessed the penalty. Not only will you have to pay interest on what you owe, you’ll get assessed the penalty in addition to the interest payments. 

Cassidy Clement 

We’ll flip this. If you were somebody who is doing well, but they have something bigger coming up and they want to increase the credit limit, what would kind of be the process? What would the steps look like? 

Caleb Silver 

Well, there’s a couple things you can do to try to increase your credit limit. One, you could do some borrowing and pay it back to show that you can borrow large sums of money and pay it back on time, as long as you’re not exceeding your credit limit.  

You can also talk to your credit card company, get them on the phone and say I would like to increase my credit limit. I’m trying to make some purchases. I’ve proven to be a good customer. Can we increase the limit there? Sometimes they’ll do that. If they won’t, there are many other credit card companies that would love to have your business, so feel free to break up with your credit card company if they’re not increasing the limit and you’ve been a good customer. There are plenty of choices out there. 

Cassidy Clement 

Before we wrap this up, are there any other tips or anecdotes that you want to share with the listeners as they start to enter the credit card journey of adulthood? 

Caleb Silver 

Yeah. So, a lot of people may know folks that have multiple credit cards, 5,6,7 or 8, and they just rotate from one to the other. That is not a great strategy for making sure that you have a good credit score. And also, for managing your finances.  

And I’ve known people who literally just parlay all their expenses from one card on to the next card. Keep moving it on to the next card that ultimately catches up with you. You don’t want to have, generally speaking more than two or three credit cards, and if you have those credit cards, you have to use them. Again, that’s your Credit Utilization Rate.  

So if you’re not using the credit cards they give you, they will lower your credit limit. Won’t hurt your credit score necessarily, but it might hurt your chances of getting a high credit limit the next time you apply for a card.  

And I’m telling you this because this happened to me recently. I had too many credit cards. You get attached to them looking at them in your wallet overtime or maybe I’ve had this one for the last 20 years. I’ve been a good customer. I’ve just stopped using it because I was using other rewards cards.  

They lowered my credit limit by half and it took me by surprise because I’m a really good customer with a pretty good credit rating. And then when I spoke to them, they said you just weren’t using it and in fact I wasn’t. So, what did I do? I got rid of that credit card.  

It was an emotional breakup, but it was actually the right thing to do. And I’m using the credit cards I have to the extent that I need them. I’m always paying back my bills, but you want to make sure you don’t have too many, right? And the ones that you have are actually serving your purposes. If you’re a small business owner, it’s helping you make those purchases. If you’re somebody who travels a lot for work, use your rewards card so you’re getting the benefits of those rewards.  

Again, it could be upgrades to better seats. It could be accessed to an airport lounge, it could be a cheap ticket. It could be a discount on a rental car. Make sure you’re using your rewards and make sure you’re using your credit cards and you don’t have too many.  

That’s something that also could affect your credit limit as well. If you have multiple cards and you’re really not using them, you’re not proving to be a good credit card customer, so that could affect you in the long run as well. So be a sensible user of credit cards. They are there to help you make those purchases at the moment, as long as you’re paying back your bills over time. And the more you do that overtime, the higher your credit limit, the higher your credit score. So when it comes time to make the big purchase, you’ve proven that you are a good borrower and you’ll get that approval from a bank, maybe to take out a mortgage or take out a car payment. 

Cassidy Clement 

So with all of those pieces that you said, that’s kind of part of the core reasoning for this podcast network in general, which is making sure that listeners take a moment and think, how is my money working for me? And making sure that whatever they decide to add to their financial journey backpack actually is getting the correct amount of use and helping them out with their portfolio, with their credit, whatever type of personal finance situation they may be in.  

But thank you so much for joining us, Caleb. Got a lot of great insights today. 

Caleb Silver 

My pleasure. And I think it really comes down to being the CEO of your own financial life, right? Think about it as a balance sheet. Your credit cards are part of that mix. Thanks for having me. I really enjoyed it. 

Cassidy Clement 

Yeah, thank you. So as always, listeners can learn more about an array of financial topics for free at ibkrcampus.com. Follow us on your favorite podcast network and feel free to leave us a rating or review. Thanks for listening everyone.