Breaking down the various types of credit cards:

By Ben Woolsey

In the early days of credit cards, things were pretty straightforward, with each issuer producing one card with one set of features. Today, credit cards come in multiple levels with ranging interest rates, fees and reward programs, so before you fill out an application, it's important to know which will best suit your financial situation and lifestyle.  Financial research company Cannex reports that 39 percent of Australians chose a credit card because of the linked reward benefits.

The following is a brief description of the most common types of credit cards available.

Standard credit cards
Balance transfer credit cards
Low interest credit cards

Credit cards with rewards programs
Cash back credit cards
General reward points credit cards
Retail reward credit cards
Petrol points / rebates credit cards
Automobile manufacturer reward credit cards
Frequent flyer credit cards
Airline-specific credit cards

Credit cards for high credit risk users
Secured credit cards
Prepaid credit cards

Standard credit cards
These credit cards are the most common and are readily available from most banks and financial groups. They are unsecured, which means you do not have to put down a security deposit to prove the money can be repaid. You can choose between cards with annual fees (usually linked with a lower interest rate) and fee-free cards, which often mean higher rates. Credit cards vary in their interest-free periods, too - and if you usually pay your card off each month, this is an important feature. The way the annual percentage rate is offered or calculated for these cards can vary. Here are two examples:

• Balance transfer credit cards: Balance transfer credit cards allow consumers to transfer a high interest credit card balance onto a credit card with a low interest rate. Typical in the market today are balance transfer credit cards that feature a very low -- sometimes zero percent -- introductory annual percentage rate (APR) that usually lasts six months to a year. In some cases, the low rate applies to the transferred balance for the life of that balance, with a higher rate applying to new purchases. The terms of balance transfer credit cards varies between offers, so be sure to thoroughly read the terms and conditions for each card.
• Low interest credit cards: Low interest credit cards offer either a single low fixed-rate APR or a low introductory APR that jumps to a higher rate after a certain period. Often, they incur an annual fee. Low interest cards can be very useful when consumers need to make a large purchase because it allows several months to a year to pay it off with very low or no interest. Before using a low interest card, read all the terms and conditions of the introductory rate so you will not be surprised by fees or accumulated interest.

Credit cards with rewards programs
Reward credit cards allow users to earn incentives for making purchases with their credit card. Points accumulate for each dollar charged on the card, and cardholders can redeem these points for various rewards. Reward cards often require better-than-average credit for approval. There are a number of major types (not including airline miles/frequent flyer cards, which are discussed separately).

• Cash back credit cards:This type of credit card allows you to earn cash rewards for making purchases. The more the card is used, the more cash rewards you receive. Many cash back cards earn users around one percent of the total purchases, excluding interest and finance charges. Watch out for those which limit the total cash-back amount to a certain amount, often equal to the annual fee of the credit card. Unless the card offers a low rate, you're not really getting much of a deal. Some cards offer a higher cash back percentage with increased usage, while others offer a higher cash back percentage at selected retailers or for particular types of purchases. Since cash back programs can be costly to credit card companies, most have an annual fee varying between $50 to $120. This type of card is best for people who are faithful about paying off their balances each month. If used appropriately, a cash back credit card can earn the cardholder a significant amount of money over time. But you need to make sure that the money you "earn" is worth the fee or higher rate that these cards often attract.
• Reward points credit cards: Reward credit cards are similar to cash back cards in that cardholders can accumulate points toward a reward structure, which is based on how much the card is used over time. General reward cards offer cardholders a variety of items to cash points in for: gift cards, electronics, accommodation, plane tickets, jewellery and more. Some have specialty card themes - like an environment card that allows you to contribute a percentage of your annual purchases to such things as carbon-offset programs. Reward programs and promotional offers often change; make sure you thoroughly review a card's terms and conditions before applying. Some general reward credit cards come with an annual fee ranging from $50 to $100, although most have no annual fee. Reward cards are best for people who regularly pay off their balances each month. By minimising their finance charges, individuals will reap greater benefits from the associated rewards credit card.
• Retail reward credit cards: These credit cards are co-branded with a major retailer, such as Coles Myer. Points are accumulated by making everyday purchases, with cardholders awarded double or triple points for making purchases from the co-branded retailer and their associated businesses. Usually reward points must be redeemed for products or services from that specific retailer.
• Frequent flyer / FlyBuys credit cards: While general reward credit cards will allow points to be redeemed for plane tickets among other things, reward cards that are specifically for air travel often have a more generous dollar-to-air-mile ratio. This type of card allows consumers to earn airline mile credits whenever they make purchases. Some cards are co-branded with a specific airline, while some are generic and can be redeemed for tickets with a variety of airlines. Some are linked to Australia's most popular flight loyalty scheme, FlyBuys (which has about  5 million members) and points are redeemed for airline travel, much like frequent flyer miles.  Check whether the card is linked to a particular scheme or allows you to redeem your reward points for air travel through any airline, travel agent or online travel site. With air travel rewards cards, you gain points for every dollar spent on the card, but unless a card is associated with a particular airline, you won't gain additional points by flying.
• Airline-specific credit cards: These cards are associated with one airline. Typically, the cardholder accumulates points from both making purchases with the card and by flying on the specified airline. These cards come with other perks -- for example, some allow you to earn double points when you use the card to purchase plane tickets with that airline or they might come with free membership to a flight lounge. Each airline credit card is a bit different, so be sure to read the card's terms and conditions to find out how many air miles you gain for every dollar spent. Other things to look for are how many miles you need before you qualify for a free plane ticket, if there is a cap on points that can be earned annually and whether or not unused airline miles expire. Some expire in five years while others do not expire at all. Airline mile reward programs can be costly for credit card companies, so many of these cards come with an annual fee. This type of reward program is beneficial for frequent travellers or those who want to use their card to plan vacations, but the associated fee might make them impractical for other cardholders.
• Petrol points / rebates credit cards: Credit cards which deliver fuel rewards are generally brand-specific, so rewards can only be redeemed with one fuel company. With the rising price of fuel now having a significant impact on the household budget, these cards can be very useful, but if you tend to just stop at whichever petrol station is closest, you may not be able to make the most of this sort of card.
• Automobile manufacturer rewards cards: Auto rewards cards allow consumers to earn points that can usually only be redeemed toward the purchase of a new car. This card is most beneficial to those looking to purchase a vehicle in the near future and for some cards, the points may expire if not redeemed after several years.

Bad credit and/or credit repair cards
Credit can easily go from good to bad due to poor budgeting or simply by an overlap between jobs. If your credit score is less than satisfactory, it does not mean you cannot qualify for a credit card. There are several options available to those who have had bad credit in the past and for those who are currently trying to repair their credit.

Depending on your specific situation, debt consolidation or use of introductory APRs on balance transfers may be wise choices. If you still need credit or want to start repairing your credit by proof of action, there are a couple of credit cards designed to help rebuild poor credit histories.

• Secured credit cards: Secured credit cards require collateral for approval. A security deposit of a predetermined amount is needed in order to secure the credit card, and the security deposit generally needs to be of equal or greater value than the credit amount. Collateral usually comes in the form of property, car, shares or anything else of monetary value. Secured credit cards are for people with either no credit or poor credit who are trying to build or rebuild their credit history. Cards that help rebuild credit often come with low credit lines (such as $250) and additional fees, such as an application fee, may apply. Be sure to read over any terms and conditions for these add-on services before applying. If you use the card responsibly and pay all your bills on time, you can ask for a credit line increase down the road. The extra fees and low credit lines will be worth it if a secured credit card helps you get your overall credit back on track.
• Prepaid credit cards: Prepaid cards are not credit cards at all, but are used and accepted in most cases just like them. The advantage of prepaid cards is that there are no finance charges, and they help you avoid debt since all purchases are paid for beforehand. With these cards, you determine the credit line by transferring however much money you'd like to have available to spend to the card. This eliminates the risk of running up credit card debt and makes the budgeting process much easier. Although most prepaid cards do not charge finance fees, other fees may apply, including monthly fees, startup or application fees, over-limit fees, ATM fees, reload fees and more. Also, sometimes they may not be as accepted as regular credit cards. Be sure to thoroughly look over the terms and conditions for each specific card before applying.

Specialty credit cards
These types of cards are for consumers with unique needs for their credit use, such as business professionals and students. These credit card programs are designed specifically to meet the needs of those individuals.

• Business credit cards: These cards are available for business owners and executives and have many of the same features as traditional credit cards: low introductory rates, cash back programs, insurance and airline rewards. The difference is these cards often come with additional benefits tailored for those in the business world, such as expense management reports, which include separation of GST amounts and the ability for transactions to be imported into common accounting programs such as MYOB, Quicken and Excel. Other advantages include the ability to have a number of additional cards on one account, for multiple employees; and higher credit limits. Every credit card is a bit different and promotional offers often change, so be sure to thoroughly look over the terms and conditions for each specific card before applying.
• Student credit cards: Many tertiary students in Australia want a credit card, but they generally have little or no credit history, which makes it difficult to get approved for a traditional card. A number of financial providers offer student credit cards designed for those enrolled in full-time courses to help them build a credit history from the ground up. Some are only available to students who have completed two years of full-time study. Compared to consumer credit cards, student credit cards can be scaled back somewhat in terms of rewards, features and other benefits, but they can still be a valuable commodity. If used wisely, a student can take the first step towards building a solid credit history with this type of credit card.  Once they've proven financial responsibility, it will be much easier to qualify for reward cards and higher credit lines.

Updated: May 13, 2009