The following is a guest post by Louise who writes for MoneySupermarket.com.
Credit cards are one of the most common forms of payment, partially because they are so convenient to use. Carrying one of these little plastic cards in your wallet means you can make a purchase whenever you feel the urge to splurge. But when are credit cards not credit cards? The answer is when they are actually store cards, loyalty cards or prepaid credit cards. All of these different types of cards have their benefits and drawbacks.
Credit cards allow you to purchase services and goods up to a set limit without paying any cash up-front. Credit card companies often offer reward programs where you can earn points by shopping and later redeem these points for travel, merchandise or gift cards. Some credit cards even put a little money back into your account with cash back bonuses. If you don’t carry a balance on your account, these rewards can actually make it profitable to shop with your credit card.
Credit card companies also charge interest, however. Many companies offer a low introductory interest rate, but the rate can increase significantly after the introductory time expires. Credit card usage also carries the risk of identity theft. Identity thieves are able to tamper with credit card equipment and record your credit card number along with your PIN. They later use this information to make purchases on your account.
Store cards are credit cards that can only be used at a specific store or group of stores. Having a store card might make you eligible for shopping discounts, special promotions or other perks, such as free gift-wrapping services or free basic alterations.
These cards can also help improve your credit score. Store credit card companies are often very lenient when it comes to approving consumers for a card, making these popular with people who wish to rebuild or establish good credit. Just make your monthly payments on time and it’s recorded in your credit history for any potential new lenders to review.
Store credit cards typically charge high interest rates, however, soaring up to over 30 percent in some cases. If you have a tendency to revolve your balances, rethink using store cards. Paying a lot of interest will quickly offset any special discounts you receive. It’s a good rule of thumb to never use a store card unless you are sure you can pay off the entire balance every month.
Store cards generally have low credit limits. This means you can quickly run up your balance, which increases the percentage of your debt-to-credit limit ratio. Keep the balance beneath 30 percent of your credit limit, so you don’t harm your credit score.
Many retail stores offer loyalty cards to their customers. Also referred to as rewards cards, advantage cards and points cards, loyalty cards give discounts, points or double coupon savings to the cardholders.
Using these cards tells the retailers what you purchase and how often you shop at their stores. The retailers then use your preferences to send you discounts, coupons or other rewards. Some customers enjoy the specialized discounts while others see this as an invasion of privacy. You can turn this into your advantage though by signing up for Upromise and earning money for your children’s college education. Upromise is the smart way to save for college!
Prepaid Credit Cards
Prepaid credit cards are used in ways similar to credit cards. However, the cardholder must load funds on to the card before using it to make a purchase. The amount you load on to a prepaid card determines your credit limit. Most prepaid card companies have websites where you can easily load or reload funds.
The best prepaid credit cards carry a major brand, such as MasterCard, Visa or American Express, so they can be used wherever those cards are accepted. Many parents issue prepaid cards to their children to give them their allowance. It allows you to keep track of your child’s spending habits while teaching your kid financial responsibility.
Many shoppers prefer to use prepaid credit cards for online purchases. You can pay for your items without putting your personal and financial information out there on the internet. Prepaid cards typically don’t have any interest charged to their account. However, these cards can have very high fees. Most of these cards charge a purchasing fee, transaction fees and a monthly maintenance fee. After adding up all of the fees, a prepaid card can be a very expensive way to shop.