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Debt Consolidation Loans: What You Need to Know

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Keeping track of your finances can be difficult, especially when you have several payments going in several different directions. If that sounds familiar, a debt consolidation loan could help. 

Our guide will break down what you need to know about debt consolidation loans and help you decide whether or not they’re the best option for you.

What are Debt Consolidation Loans?

Debt consolidation loans are used to combine multiple debts, such as credit cards, high-interest loans and medical bills, into an account with one monthly payment and lender. Debt consolidation loans are a type of personal loan

Applying for and receiving a debt consolidation loan is a multi-step process that requires you to choose your loan terms, finalize your application and repay the loan.

Here are the steps you should take when applying for a debt consolidation loan:

  1. Meet preapproval terms. Preapproval terms will differ between lenders, but typically they request that you have at least a 580 credit score and no bankruptcies. A lender will perform a soft inquiry on your credit to see if you meet their requirements before quoting you a rate. 
  2. Decide which credit card debts to pay off. Before choosing your loan terms, prioritize which of your credit cards you want to pay off first. This will dictate how much you borrow and the length of the loan. 
  3. Finalize your application. Finalizing your application requires a hard inquiry on your credit report.  
  4. Go through a closing process. If you’re approved, loans are disbursed either directly to your creditors or sent to you by check.
  5. Start paying off your debt.      

There are two types of debt consolidation loans: secured and unsecured. Secured debt consolidation loans use collateral, such as home equity. While secured loans typically have better interest rates, they can be risky. You could face foreclosure if you can’t pay your debt. 

Unsecured loans are more common and don’t require any collateral, but they typically have higher interest rates and are more expensive to pay down. 

How Do I Qualify for a Consolidation Loan?

To qualify for a debt consolidation loan, you must meet lender requirements. 

Lenders often use your credit score to determine your interest rate. Having a high credit score, a lower debt-to-income ratio and a stable income will increase your chances of securing a loan.

Traits to Increase Your Chances of Securing a Debt Consolidation Loan Image

Can I get a Debt Consolidation Loan with Poor Credit?

Lenders view people with low credit scores as high risk, so it might be difficult to get approved for a debt consolidation loan if you have poor credit. Those with poor credit who are approved will end up paying higher interest rates. 

If you have a low credit score, be cautious about taking out a debt consolidation loan. The interest rate on a debt consolidation loan could be higher than your existing debt, making it more expensive to pay down. 

How to Choose the Right Loan

When choosing a debt consolidation company, compare loan terms and interest rates to see how much interest and how many fees you’ll pay overall. This can help you pick the loan option that saves you the most money.

Here’s what you should consider when evaluating a debt consolidation loan: 

  • Interest rates: Most lenders offer a fixed-rate loan, while some offer both fixed- and variable-rate loans. 
  • Loan terms and restrictions: Review the loan period length and loan amounts to see whether the amount and repayment timeline meet your needs.  
  • Fees and penalties: Look at the origination, prepayment and late fees, which can significantly increase the cost of your loan. Some lenders place restrictions on how you use the loan, such as prohibiting consolidations on student loan debt.
Factors to Consider When Picking a Debt Consolidation Loan Image

Is it a Good Idea to Get a Debt Consolidation Loan?

There are benefits to using a debt consolidation loan, but there are also potential disadvantages. Ultimately, it depends on your personal situation. 

If you qualify for a new loan with favorable terms and a lower interest rate than your current debt, it could be a good idea. However, you need to consider your credit scores, income and ability to repay the loan.

Pros

  • Debt consolidation loans can have lower interest rates than credit cards and other types of debt, depending on your credit range. If you qualify for a low-interest loan, you can reduce your current interest rate and save money on repayment.
  • You can lock in a low rate with a fixed-rate debt consolidation loan instead of owing money at variable rates.
  • A debt consolidation loan gives you a debt repayment timeline specified in your loan agreement, so you’ll know exactly when you’ll pay off the loan. 
  • You’ll have payments that are easier to handle if the loan lowers your monthly payments. This means that you’re less likely to be subject to additional fees and higher interest rates that come with missing a payment.

Cons

  • People with low credit scores may only be given loans with a higher APR than their existing debt. 
  • You could wind up paying a lot more interest overall, depending on your loan’s interest rate. Although your monthly payment might be lower, your repayment term could be longer. 
  • A low-interest rate for a debt consolidation loan could just be a “teaser rate” that only lasts for a certain time. After that, your lender may increase the rate you have to pay.
  • The loan may also include fees such as application fees, origination fees or prepayment penalties that you would not have to pay if you continued to pay back your current lenders.
  • You put your house, car, retirement fund or other assets at risk when you use collateral to secure your loan. If you’re not able to pay your loan, you could face losing those assets.
  • You could end up in more debt if you get a consolidation loan and keep making more purchases with credit.

What are Alternatives to Debt Consolidation?

If debt consolidation isn’t your best option, there are other ways to manage your debt. 

  • Credit cards with an introductory 0 percent APR balance transfer allow you to consolidate your debt on one credit card. Be aware: if you are more than 60 days late on a payment, you face a penalty APR on all balances, including the transferred balance. There’s also usually a balance transfer fee, either as a fixed amount or a percentage of the amount you transfer.
  • Creating a budget can help you understand how much you can afford to pay each month toward existing debt. 
  • Responsible credit card usage can ensure you aren’t allowing your balances to get too high. If you’re spending more than you’re earning, consider adjusting the way you spend to pay off your existing debt.
  • Bankruptcy may be an option if you are overwhelmed with debt and see no way to pay it off. However, a bankruptcy can remain on your credit report for up to ten years.
Other Options for Managing Debt Image

Do Consolidation Loans Hurt Your Credit Score?

A debt consolidation loan could actually help your credit score. If you have a high credit balance, consolidating could lower your utilization rate. Additionally, a lower payment each month could mean more on-time payments.

That being said, how your debt consolidation loan affects your credit score really depends on your ability to make your payments. Having monthly payments due on a loan, in addition to credit cards, could put you in an even more difficult situation.  

Managing Multiple Payments, Debt Consolidation Loans, and Your Credit Report

Many consumers turn to a debt consolidation loan because of the challenges they face keeping track of multiple accounts. 

Mistakes can happen, but if payments are applied to the wrong account or your accounts are reported more than once, it could make you appear risky to lenders. Mistakes on your credit report can be costly and unfairly affect your credit score if they go unfixed. 

Credit repair can be a hassle, especially if you are unfamiliar with the process. At Lexington Law, we do the heavy lifting to make the dispute process easier, by identifying and challenging questionable negative items on your behalf. Although we don’t manage debt consolidation loans directly, our team of credit report consultants can help you navigate the credit repair process. 

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Subsidized vs. Unsubsidized Loans – Lexington Law

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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

The federal direct loan program offers subsidized and unsubsidized loans to college students. A federal direct subsidized loan is a loan where the government pays the interest while the student is in school. A federal direct unsubsidized loan is one in which the student is responsible for paying all interest, receiving no additional federal aid.

What Is the Difference Between Subsidized and Unsubsidized Student Loans?

The main differences between federal direct subsidized and unsubsidized loans are the qualification criteria, the maximum limits and how the loan interest works.

A chart displaying the differences between subsidized and unsubsidized student loans.

Loan Qualifications

Subsidized: To qualify for a subsidized loan, you must be an undergraduate student who can demonstrate financial need based on the information you submit through the Free Application for Federal Student Aid (“FAFSA”).

Unsubsidized: Unsubsidized loans are available to both undergraduate and graduate students, and there is no requirement to demonstrate financial need.

Maximum Loan Limits

Subsidized: Your school will determine exactly how much you can borrow each year, but there are federal limits. These limits are based on what year of school you are in and whether you file as a dependent or an independent. Subsidized loan limits tend to be lower than unsubsidized limits. The aggregate limit for an independent student with subsidized loans is $23,000.

Unsubsidized: Unsubsidized loan limits tend to be higher than subsidized loan limits. The aggregate limit for an independent student with unsubsidized loans is $34,500.

How Interest Accrues

Subsidized: The U.S. Department of Education pays the interest for subsidized loans as long as the student is enrolled in school at least half-time. They will also pay the interest during your grace period—defined as the first six months after leaving school—and any period of deferment. This means that the amount of the loan will not grow once the student graduates, since the government has been paying the interest.

Unsubsidized: Whether you’re an undergraduate or a graduate student, you’re responsible for paying all of the interest during the entire life of your unsubsidized loan.

What Are the Similarities Between Subsidized and Unsubsidized Student Loans?

When it comes to interest rates, fees and the “maximum eligibility period”—the amount of time you’re able to take out loans—subsidized and unsubsidized loans are virtually the same.

Fees

On top of interest, you can expect to pay a small fee for both types of loans. This is approximately 1.06 percent of your total loan amount, and it is deducted from each loan disbursement. 

Both subsidized and unsubsidized student loans have a fee of 1.06% of the total loan amount.

Undergraduate Interest Rates

The interest rates for both subsidized and unsubsidized loans for undergraduate students are the same. Currently, the rate is at 2.75 percent for loans first disbursed from July 1st, 2020, to June 31st, 2021. The one exception is for direct unsubsidized loans for graduate students, which have an interest rate of 4.30 percent. 

Maximum Eligibility Period

For both loan types, the time in which you’re eligible for your loans is equal to 150 percent of the time of your program. For undergraduates pursuing a four-year bachelor’s degree, this means they will be eligible for their loans for six years. Those pursuing a two-year associate’s degree will be eligible for three years. This ensures that students can still receive loans even if they’re unable or choose not to graduate within the program’s time frame. 

How to Apply for Subsidized and Unsubsidized Loans

Once you’re ready to apply for a federal direct loan, fill out the FAFSA. Your school will send you a detailed report of what student aid you’re eligible for. Any grants or scholarships are free money, so make sure to accept them. They’ll also decide which loans you’re eligible for, the amount you can borrow each year and what loan type you can get—subsidized or unsubsidized. 

No matter what type of student loan you go for, it’s important to understand how they affect your credit so that you can set yourself up for financial success after graduation. With responsible, on-time payments, you’ll be well on your way to healthy credit for life.


Reviewed by Cynthia Thaxton, Lexington Law Firm Attorney. Written by Lexington Law.

Cynthia Thaxton has been with Lexington Law Firm since 2014. She attended The College of William and Mary in Williamsburg, Virginia where she graduated summa cum laude with a degree in International Relations and a minor in Arabic. Cynthia then attended law school at George Mason University School of Law, where she served as Senior Articles Editor of the George Mason Law Review and graduated cum laude. Cynthia is licensed to practice law in Utah and North Carolina.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

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Chapter 7 vs. Chapter 13 Bankruptcy

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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Bankruptcy is a legal process that lets you restructure your debts or have them discharged. The details of how your bankruptcy plays out depend on your overall financial situation and what type of bankruptcy you file, but the goal of bankruptcy is to help debtors who can’t pay all their debts create a path toward a better financial future while paying as much as they can. To determine how much you pay, consider Chapter 7 vs. Chapter 13 bankruptcy.

It’s important to note that bankruptcy should be a last resort. It has serious consequences for your credit and immediate financial future, which means you may want to consider all other options first. Find out more about Chapter 7 vs. Chapter 13 bankruptcy below and then talk to a lawyer about what might be best for you—many bankruptcy attorneys offer free consultations for this purpose.

What Is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is sometimes referred to as liquidation bankruptcy or the fresh start bankruptcy.  While every situation is handled according to the details of the case, the basic concept of Chapter 7 is that your non-exempt assets are liquidated to repay creditors and any remaining debt not covered is discharged in the bankruptcy.  It should be noted that many families have no non-exempt assets, or very few non-exempt assets.

How It Works

First, you go through a pre-filing credit counseling course and obtain a certificate that you file when you file a petition with the court for Chapter 7 bankruptcy.  Before filing chapter 7 you must perform the “means test” to determine whether you qualify for chapter 7 at all. 

The means test considers your income for the preceding six months, your family size, and some other factors.  If you qualify for chapter 7 you can prepare and file your chapter 7 papers yourself, but most experts recommend working with a bankruptcy lawyer, as the process is complex.

You must also submit records including lists of all your assets and debts, your current income and expenses, tax returns and other documents related to your financial status, including contracts like leases that might be in play.

You’ll also be required to go through credit counseling after your bankruptcy is filed, and submit a certificate that you did so—if you work with a bankruptcy attorney, they usually help facilitate this.

Most creditor activities against you, such as lawsuits, foreclosures and wage garnishments, must be halted as soon as you file the petition and the creditor finds out about it. This is known as the automatic stay.

Within a few weeks, the bankruptcy trustee holds what is called a meeting of creditors. This is a hearing you must attend. You are placed under oath and the trustee, along with any present creditors, asks you questions. The trustee uses this information to determine whether you have any non-exempt assets or transactions that can be reversed. 

The trustee is looking to see if s/he can obtain any money for your creditors. The trustee is also looking to insure that debtors are truthful and fully disclosing of their situation. 

Once the case proceeds past this point, your debts are discharged as agreed upon after liquidation of non-exempt assets (if any) occurs and funds are disbursed to various creditors by the trustee. Some of your assets are protected by exclusions, including certain personal items and clothing.

You may also be able to keep a vehicle for the purpose of travel to and from work as well as your home, depending on how much equity you have in it.

Eligibility Rules

Eligibility for Chapter 7 bankruptcy depends on income and the application of a means test.

You may be eligible for a Chapter 7 filing if you pass the rigorous requirements of the means test, a test which looks at your income for the last six months, your family size, and other items, and compares you to other persons of the same family size in your area to determine whether you qualify.

Unsecured debt refers to debt that isn’t secured by property. Vehicle and home loans are secured by property, meaning the bank can take that property if you don’t pay to mitigate some of their losses. Credit cards are not usually secured, but may be in some instances. Priority unsecured debt refers to amounts you owe on taxes or child support.

Nonpriority unsecured debts are items such as credit card debt, personal loans and medical debt.

This is a lot of information, and it does sometimes get complex. But the bottom line is that if you have too much income, you may not be able to file Chapter 7. That’s because the court assumes you have enough income to pay at least some of your creditors.

Pros

If you qualify for Chapter 7, it can help you start fresh with debt. In some circumstances, you may leave the bankruptcy with no debt at all. It’s also faster than other forms of bankruptcy because there’s no repayment plan period.

Cons

Chapter 7 is looked at by future creditors as worse than Chapter 13 because it shows no effort to make any payment on debt owned. The Chapter 7 negative listing on your credit report will also show up for 10 years after you file the petition.

What Is Chapter 13 Bankruptcy?

A Chapter 13 bankruptcy is a restructuring plan. You work through the bankruptcy trustee to pay some, but usually not all, of your debts over three to five years. If you meet all the requirements of the plan, your remaining debt may be discharged at the end of the bankruptcy.

How It Works

Many of the processes associated with filing a Chapter 13 bankruptcy are the same as when you file a Chapter 7 bankruptcy. You take the pre-filing credit counseling course, file the petition, an automatic stay goes into place, you attend the meeting of creditors and then you work with the trustee via your attorney to make the appropriate payments every month.

You pay the trustee as dictated by your bankruptcy plan.  Once the plan is approved by the court, the trustee then disburses that money to your creditors. If you miss your Chapter 13 bankruptcy payments, the trustee can file a motion to dismiss your case, and you would then owe all the debts and creditors could begin collections actions against you again.

Once you complete the Chapter 13 bankruptcy repayment plan, you are typically entitled to a discharge of all remaining debts under the bankruptcy.

Eligibility Rules

Eligibility for Chapter 13 bankruptcy depends on the amount of your debts as well as your ability to make payments as planned in your repayment plan.

  • Unsecured debts must be less than $ 419,275. (As on October, 2020 –this number increases periodically with inflation.)
  • Secured debts, including any mortgages, must be less than $1,257.850. (As of October, 2020 –this number increases periodically with inflation.)
  • For your repayment plan to be confirmed, the trustee has to deem it possible for you to make the payments. If, for example, you agree to make a payment that totals your monthly income and leaves no room for living expenses, the trustee is likely to reject the plan.

Pros

Chapter 13 bankruptcy stays on your credit for less time than a Chapter 7—up to seven years from the filing date. Future creditors might also look more favorably upon it because it shows that you made some effort to repay debts. In a Chapter 13, you are typically able to keep all your belongings and don’t have to liquidate them.

Cons

You do have to make some payments toward debts, which can mean a hefty monthly payment to the trustee. You also agree to submit certain financial decisions, such as whether you take on new debt, to the court during the repayment plan.

Which Kind of Bankruptcy Is Best for Me?

Chapter 7 may be a good choice if your income is low or if you are struggling to make any payment on debts. Chapter 13 may be the right choice if you do have some ability to pay but you’re simply overwhelmed with your current debt load.

The decision can be complex, so it’s important to consult a bankruptcy attorney to find out what your options are and what might be right for you.

How Do I Apply for Bankruptcy?

You apply for a bankruptcy by filing a bankruptcy petition. You can file on your own or through an attorney.

How Does Bankruptcy Affect My Credit?

Depending on how you file, bankruptcy stays on your credit report for up to seven to 10 years. Bankruptcy appears on your credit report as a negative public record item, and it can bring your score down substantially. How much your score drops depends on what it was before you entered bankruptcy and other factors, but it’s typically enough to drop you down to a different range—such as moving you from good to fair or poor credit.

Typically, by the time someone makes the decision to file for bankruptcy, their credit score is already suffering because of late payments or delinquent accounts in collections. A bankruptcy is a big hit, but it’s not a death knell for your good credit. In fact, if you’re responsible with debt following your bankruptcy, you can work toward a better credit future.

It’s a good idea to keep an eye on your credit as you move through the bankruptcy process. Address inaccurate information as soon as possible to keep your score from dropping any lower. Find out more about Lexington Law credit repair services and how they might help you continue to positively impact your credit as you move past your bankruptcy.


Reviewed by Vince R. Mayr, an Associate Attorney at Lexington Law Firm. Written by Lexington Law.

Vince has considerable expertise in the field of bankruptcy law. He has represented clients in more than 3,000 bankruptcy matters under chapters 7, 11, 12, and 13 of the U.S. Bankruptcy Code. Vince earned his Bachelor of Science Degree in Government from the University of Maryland. His Masters of Public Administration degree was earned from Golden Gate University School of Public Administration. His Juris Doctor was earned at Golden Gate University School of Law, San Francisco, California. Vince is licensed to practice law in Arizona, Nevada, and Colorado. He is located in the Phoenix office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

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15 Types of Credit Cards

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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Whether you’re a seasoned cardholder or a first-timer, you may be surprised at how many types of credit cards are available. Depending on your credit score and the length of your credit history, you may not be able to qualify for the ones with the most favorable terms and lowest interest rates. But chances are, there’s a card that fits your needs and—if used responsibly—may help you build credit.

Broadly speaking, there are four different types of credit card categories:

  1. Cards That Help Build Credit
  2. Cards That Can Save You Money
  3. Cards That Offer Cash Back and Rewards
  4. Cards for People With Bad Credit

Here, we’ll break down each category, discuss the specific card types and explain each one’s unique benefits so that you can make the most of your card.

Cards That Help Build Credit

If you’re new to the world of credit, you may be wondering how to build credit quickly, without going into debt. If you’re in college, you may have the added load of student debt. When you’re just starting out, it’s important to find a card that’s right for you and manage it carefully to start your credit health out on the right foot. You may even be able to earn some rewards along the way.

Cardholders ages 18 – 22 have an average credit score of 672.

1. Student Credit Cards

Student credit cards operate exactly the same way that standard credit cards do. The main difference is that their total credit limits tend to be lower. Additionally, since they are marketed toward students who likely don’t have much of a credit history, the requirements for approval are typically more lenient. 

Benefit: Some student cards offer incentives for good grades, like a small cash reward for each school year that you earn a GPA of 3.0 or higher.

Example: Discover it® Student Cash Back

2. Starter Credit Cards

Starter credit cards are designed for those with little to no credit history. Consider getting one if you’ve never had a line of credit, or if you have one that hasn’t been open very long. These cards typically don’t offer great rewards programs or cash-back incentives, and they come with high interest rates. However, if you can find one with no annual fee, it can be a great option to begin building credit.

Benefit: Establish your credit and build a solid payment history with this type of credit card, which is generally easy to qualify for.

Example: Capital One Platinum® Credit Card

3. Joint Credit Cards

Unlike authorized user credit cards, joint credit cards require both parties to apply together. Both parties are equally responsible for paying the balance. Therefore, late or missed payments may ding both credit scores—while consistent, on-time payments will benefit both scores. 

Benefit: If a person doesn’t have a high enough credit score to qualify for a good credit card, they may consider applying with their partner for a joint credit card with more favorable terms.

Example: Bank of America® Cash Rewards Credit Card

Cards That Can Save You Money

Sometimes applying for a credit card is a strategic move. Maybe you want to transfer your balance to a card with a lower interest rate, avoid paying interest for an introductory period or customize features for your business. These cards can help you save money—your way.

Approximately 74% of credit cards have no annual fee.

4. Zero Percent Purchase APR Credit Cards

Sometimes cards will offer temporarily lower APRs for an introductory period. Cards that boast zero percent APR don’t require you to pay interest on new purchases for a set amount of time, usually about 12 months. 

Benefit: Save money on interest by borrowing money essentially for free. Just make sure to pay off your balance by the time your introductory period is over to avoid interest charges.

Example: U.S. Bank Visa® Platinum Card

5. No Annual Fee Credit Cards

Many credit cards charge annual fees for the convenience of having the card and for the benefits and rewards they offer. Depending on how elite the card is, these fees can be up to $450 or more. However, almost three-fourths of cards offer no annual fee—and many of these still come with decent cash back programs. Scan your credit card offer or the terms and conditions to make sure your card has no annual fee. 

Benefit: Save an average of $58 each year by avoiding unnecessary annual credit card fees.

Example: Citi® Double Cash Card

6. Balance Transfer Credit Cards

Similar to zero percent purchase APR credit cards, balance transfer cards offer temporarily low introductory rates—but specifically for balance transfers. This is a great option for those who want to save money on a high-interest credit card. Rather than closing the unfavorable card—which may lower your credit score—a balance transfer may be a better option.

Benefit: Avoid paying hefty amounts of interest by transferring your balance to a card with a much lower introductory rate. 

Example: Wells Fargo Platinum Card

7. Business Credit Cards

If you’re a business owner, you may want to apply for a credit card specifically for business use. This will help you separate personal and business expenses, and the rewards may help your business save money. You’ll then begin to build business credit. To apply you’ll need decent credit and either a federal tax ID or employer identification number (EIN).

Benefit: Enjoy business-specific perks like higher credit limits, expense management reports and the ability to add more cards for employees. 

Example: Costco Anywhere Visa® Business Card by Citi

Cards That Offer Cash Back and Rewards

In order to get the most out of their spending, most cardholders gravitate toward credit options that offer cash back and rewards. 

Cardholders carry an average of 4.1 cards, 2.4 of which are rewards-based.

8. Cash Back Credit Cards

Cash back credit cards allow you to earn a certain percent—typically ranging from one to five—of the money back every time you make a purchase with the card. Some issuers will pay this amount annually, while others pay monthly.

Benefit: Find a card that allows you to customize where you get your cash back. For example, certain cards allow you to earn five percent cash back in a store category of your choice.

Example: Chase Freedom Unlimited®

9. Retail Credit Cards

Retail or store credit cards are offered by specific businesses and can only be used to make purchases with that store. While these cards aren’t ideal for everyday purchasing needs, they’re a great way to earn generous rewards with stores that you frequently shop at. There are over 300 store credit cards available, from Walmart and Target to Lowe’s and JCPenney. 

Benefit: Store cards typically don’t charge annual fees, don’t require excellent credit and offer substantial first-purchase discounts as well as long-term cash back rewards.

Example: Amazon Prime Store Card

10. Hotel Credit Cards

Hotel credit cards are affiliated with a specific hotel chain and offer rewards on a “points” basis. Typically, they’ll offer some points for purchases made at unrelated businesses such as grocery stores, gas stations and restaurants. But the main attraction is the bonus points earned on eligible purchases made directly with the hotel. 

Benefit: Earn generous sign-up bonuses, rewards when you spend money on hotel bookings and yearly free nights. 

Example: Hilton Honors American Express Surpass® Card

11. Airline Credit Cards

Certain credit cards offer rewards on purchases made with a specific airline, while others allow you to earn rewards with any airline or travel-related expense. These rewards rack up in the form of “miles.” For example, many cards offer two miles for every one dollar spent on flights. 

Benefit: For frequent travelers, airline credit cards are a great way to score free and discounted flights.

Example: Delta SkyMiles® Gold American Express Card

12. Gas Rewards Credit Cards

Not to be confused with gas station credit cards—which operate like retail cards—a gas station rewards card offers cash back when you pay at the pump. It can be used anywhere, but you’ll enjoy bonus rewards at gas stations.

Benefit: Earn up to three to five percent cash back on gas purchases, often with no annual fee and a zero percent introductory APR. 

Example: PenFed Platinum Rewards Visa Signature® Card

13. Charge Cards

Charge cards operate in exactly the same manner as regular credit cards, except for one major caveat: you must completely pay off the total balance each month. Failure to do so results in late fees and penalties and will cause a drop in your credit score. On the flip side, they typically come with sizable initial bonuses and rewards.

Benefit: Enjoy higher credit limits and generous point systems—oftentimes offering up to five points per one dollar spent.

Example: ThePlatinum Card® from American Express

Cards for People With Bad Credit

If you’re struggling to get approved for credit cards, loans or other lines of credit because of bad credit, don’t be discouraged. There are credit cards with terms designed specifically for those with poor credit. 

Approximately 12% of Americans have a FICO score below 550.

14. Secured Credit Cards

Most credit cards are unsecured. This means that you are not required to put up a security deposit. Secured cards, on the other hand, require an up-front payment to act as collateral in the event that you can’t pay your balance. Credit card issuers see borrowers with bad credit scores as riskier, so this deposit helps mitigate some of that risk

Benefit: Secured cards give borrowers with poor credit access to credit when they otherwise wouldn’t be able to qualify for a card.

Example: Capital One® Secured Mastercard®

15. Prepaid Cards

Prepaid cards aren’t technically credit cards, because they don’t involve borrowing money. Instead, a cardholder loads a set amount of money onto the card, and purchases are subtracted from the card’s balance, similar to a gift card. The spending limit then renews if and when the card is reloaded. 

Benefit: Prepaid cards help you stay within a budget and avoid getting into credit card debt.

Example: American Express Serve® FREE Reloads

What Type of Credit Card Is Best?

Ultimately, the decision for which card to get is up to your personal preferences and financial goals. However, there are a few good rules of thumb when looking for the best credit cards. Remember to read the terms and conditions carefully before signing up. Generally, cards with any of the following perks may be worth pursuing:

  • Zero percent introductory APR
  • Low APR after the introductory period
  • Sign-up bonus
  • Solid rewards or cash-back program
  • No annual fee

All of the different types of credit cards may seem daunting at first, but once you understand the unique benefits of each one, you’ll be able to find a card that fits your needs. Remember that—regardless of credit card type—good credit management is the key to keeping your credit healthy. After years of on-time payments, low credit utilization, a good mix of credit and few hard inquiries, you’ll be well on your way to your best score yet.


Reviewed by Kenton Arbon, an Associate Attorney at Lexington Law Firm. Written by Lexington Law.

Kenton Arbon is an Associate Attorney in the Arizona office. Mr. Arbon was born in Bakersfield, California, and grew up in the Northwest. He earned his B.A. in Business Administration, Human Resources Management, while working as an Oregon State Trooper. His interest in the law lead him to relocate to Arizona, attend law school, and graduate from Arizona State College of Law in 2017. Since graduating from law school, Mr. Arbon has worked in multiple compliance domains including anti-money laundering, Medicare Part D, contracts, and debt negotiation. Mr. Arbon is licensed to practice law in Arizona. He is located in the Phoenix office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

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