Choosing the right credit card for your situation - Hawaii News Now - KGMB and KHNL

By Andrew Housser

Everyone knows credit card debt can be a very bad thing. Certainly, excessive credit card debt is responsible for the difficult financial situations many individuals and families face. However, a credit card sometimes is necessary, and can be used responsibly. After all, without a credit card, it can be difficult to travel or even put gas in your car.

Most adults need one credit card -- but only one. To use it safely, you should only charge occasional purchases that fit into your budget, and that you can pay off in full every month. Here are the most common types of credit cards and some information about who each type is best suited for:

1) Debit card

Even though it usually has a MasterCard or Visa logo, a debit card is not a credit card. Instead, it draws cash directly out of your bank account. This is good news when it comes to balancing your budget, because you spend money you have instead of going into debt. But use caution when making purchases such as gasoline, reserving a hotel room or renting a car. For those purchases, vendors can "block" your account, which reserves spending room on your card. This can throw your budget off track, and it puts you at risk of overspending. If you opt for overdraft protection for these situations, you risk running up high fees and charges.

2) Traditional credit cards

Credit cards are issued with borrowing limits, fees and interest rate that typically are determined by the borrower's credit score and income. Each month, the credit card lender sends the borrower a bill. The borrower may pay the balance in full, which is highly preferred to avoid going into debt. Or the borrower may pay a portion of the balance, with interest accruing each month until the debt is repaid. Some cards have rewards or other benefits; borrowers should review terms carefully to be sure these benefits, which might include higher fees, are worthwhile to them.

3) Charge cards

Unlike credit cards, charge cards usually do not have a pre-set spending limit. The catch is that you must repay the full balance by the payment date. The best-known charge-card issuer is American Express. In some cases, charging privileges might be suspended if the company believes the borrower is charging beyond his or her ability to repay the debt. Usually, no interest fees are charged, but the company might charge fees to hold the card and if the balance is not fully repaid in time. Typically, borrowers must have excellent credit.

4) Subprime cards

Subprime credit cards are issued to borrowers with poor credit history. They have low credit limits, and typically, very high interest rates and fees. Fees cannot exceed 25 percent of the available card balance in the first year, excluding fees for late payments, exceeding the credit limit or insufficient funds. Card issuers must explain clearly what the fees are for, such as monthly and yearly account maintenance fees, and fees for accepting the offer of the card.

5) Secured credit card

A credit card typically is issued to people with no credit or poor credit. The borrower must provide a deposit to open the card. Then the lender applies credit card charges against the deposit. Secured cards offer a way to rebuild credit, such as following bankruptcy, or to build credit for the first time. If you are using a secured card to build credit, confirm with the card issuer that your spending and payments will be reported to all three credit bureaus.

6) Prepaid credit card

Sometimes this term refers to a secured credit card. However, true prepaid cards are more like gift cards, with payment information not recorded or reported to the credit bureaus (and thus, not helping build a credit history). Be sure you choose the type of card you need.

7) Store credit card

Some stores issue their own credit cards. Be forewarned that these cards often have very high interest rates. They also sometimes are issued by finance companies, which can, in some cases, have a negative effect on credit scores. Most people are better off paying in cash or using a regular credit card when they shop.

Whatever type of credit card works for you, be very careful with it. For most purchases, you will be safest using cash, a check or a debit card. But when you do need to make a credit card purchase, be sure you know the right card for you to stay out of debt and make the most of your money.