What Is a Security – Definition & Types That You Can Invest In

Securities are one of the most important assets to understand when you’re starting to invest. Almost every investment you can make involves securities, so knowing about the different types of securities and how they fit in your portfolio can help you design a portfolio that fits with your investing goals.

What Is a Security?

A security is a financial instrument investors can easily buy and sell. The precise definition varies with where you live, but in the United States, it refers to any kind of tradable financial asset.

Securities may be represented by a physical item, such as a certificate. Securities can also be purely electronic, with no physical representation of their ownership. The owner of a security, whether it is physical or digital, receives certain rights based on that ownership.

For example, the owner of a bond is entitled to receive interest payments from the issuer of that bond.


Types of Securities

There are many different types of securities, each with unique characteristics and a different role to play in your portfolio.

Stock

A stock is a security that represents ownership of a company.

When a business wants to raise money — for example, to invest in expanding the business — it can issue stock to investors. Investors give the business money and receive an ownership interest in the company in exchange.

The number of shares that exist in a company determine how much ownership each individual share confers. For example, someone who owns one share in a company with 100 shares outstanding owns 1% of the company. If that business instead had 100,000 shares outstanding, a single share would represent ownership of just 0.001% of the business.

Investors can easily buy and sell shares in publicly traded companies through the stock market. Shares regularly change in value, letting investors buy them and sell them for either a loss or a profit. Owning stock also entitles the shareholder to a share of the company’s earnings in the form of dividends if the company chooses to pay them, and the right to vote in certain decisions the company must make.

Bonds

A bond is a type of debt security that represents an investor’s loan to a company, organization, or government.

When a business or other group wants to raise money but doesn’t want to give away ownership, it can instead borrow money. Individuals typically borrow money from a bank, but companies and larger organizations often borrow money by issuing bonds.

When an organization needs to borrow money, it chooses an interest rate and the amount that it wants to borrow. It then offers to sell bonds to investors until it sells enough bonds to get the amount of money it wishes to borrow.

For example, a company may decide to issue $10 million worth of bonds at an interest rate of 5%. It will sell bonds in varying amounts, usually with a minimum purchase requirement, until it raises $10 million. Then, the company stops selling the bonds.

With most bonds, the issuing organization will make regular interest payments to the person who owns the bond. The payments are based on the interest rate and the value of the bond purchased. For a $1,000 bond at an interest rate of 5%, the issuer might make two annual payments of $25.

The bonds also come with a maturity date. Once the maturity date arrives, the bond issuer returns the money it raised to the bondholders and stops making interest payments. For example, when it matures, the holder of the $1,000 bond might receive a final interest payment of $25 plus the $1,000 they initially paid to buy the bond.

Interest payments and returned principal go to the person who holds a bond on the payment date, not necessarily the original purchaser. This means that people who own bonds can sell them to other investors who want to receive interest payments. The value of a bond will depend on how much time is left until it matures, the bond’s interest rate, the current interest rate market, and the bond’s principal value.

Money Market Securities

Money market securities are incredibly short-term debt securities. These types of securities are similar to bonds, but their maturities are generally measured in weeks instead of years.

Because of their short maturities and their safety, investors often see money market securities and investments in money market funds as equivalent to cash.

Mutual Funds and ETFs

Mutual funds and exchange-traded funds (ETFs) are both securities that purchase and hold other securities. They make it easier for investors to diversify their portfolios and offer hands-off management for investors.

For example, a mutual fund may purchase shares in many different companies. Investors can purchase shares in that mutual fund, which gives them an ownership stake in the different shares that the fund holds. By buying shares in one security — the mutual fund — the investor gets exposure to many securities at once.

The primary difference between mutual funds and ETFs is how investors buy and sell them. With mutual funds, investors place orders that settle at the end of the trading day. That makes mutual funds best for long-term, passive investment. ETFs are traded on the open market, so investors can buy them from or sell them to other investors whenever the market is open. This means ETFs can be used as part of an active trading strategy.

There are many different types of mutual funds and ETFs, each with its own investing strategy. Some mutual funds aim to track a specific index of stocks. Others actively trade securities to try to beat the market. Some funds hold a mix of stocks and bonds.

Mutual funds and ETFs are not free to invest in. Most charge fees, called expense ratios, that investors pay each year. For example, a fund with an expense ratio of 0.25% charges 0.25% of the investor’s assets each year. Fees vary depending on the fund provider and the fund strategy.

Preferred Shares

Preferred shares or preferred stock are a special kind of shares in a company, which have different characteristics than shares of common stock.

Compared to common stock, preferred shares typically:

  • Have priority for dividends over common stock
  • Receive compensation before common shares if a company is liquidated
  • Can be converted to common stock
  • Do not have voting rights

Derivatives

Derivatives are securities that derive their value from other securities rather than any value inherent to themselves.

One of the most common types of derivatives is an option, which gives the holder the right — but not the requirement — to buy or sell shares in a specific company at a set price. Derivatives are more complex financial instruments than generally aren’t suitable for beginners because they can be confusing and come with elevated risk.


How Securities Fit in Your Portfolio

Most investors use securities to build the majority of their investment portfolios. While some people may choose to invest solely in assets like real estate rather than securities like stocks and bonds, securities are highly popular because they make it easy for people to build diversified portfolios.

The mix of investments you choose is called asset allocation. Each type of security fits into an investment portfolio in different ways.

The Role of Stocks

For example, stocks generally offer high volatility and some risk, but higher rewards than fixed-income securities like bonds. People with long-term investing plans and the risk tolerance to weather some volatility may want to invest in stocks.

Within stocks, investors often hold a mixture of large-cap (large, well-known companies) and small-caps (smaller, newer businesses). Typically, larger companies are more stable but offer lower returns. Small-caps can be risky but offer greater rewards.

Large-caps often pay dividends, which are regular payments to shareholders. This makes them popular for people who want to produce an income from their portfolio but who don’t want to shift too heavily into safer, but less lucrative investments like bonds.

Pro tip: Earn a $30 bonus when you open and fund a new trading account from M1 Finance. With M1 Finance, you can customize your portfolio with stocks and ETFs, plus you can invest in fractional shares.

The Role of Bonds

By contrast, bonds are good for people who want to reduce volatility in their portfolios. A retiree or someone who wants to preserve their portfolio’s value instead of growing it might use bonds.

Bonds experience much less volatility than stocks, with their values changing primarily with changes in interest rates. If rates rise, bond values fall. If rates fall, bond values rise.

If you hold individual bonds and don’t sell them, you can only lose value from the bonds if the issuer defaults and stops making payments. That means that bonds can provide a predictable return, assuming you can hold them to maturity.

Bonds also make regular interest payments, often twice annually, making them very popular for income-focused investors.

The Role of Mutual Funds

A huge number of everyday investors opt to invest in mutual funds and ETFs instead of buying individual stocks and bonds. These funds hold dozens or hundreds of different stocks and bonds, making it easy for investors to diversify their portfolios. There are also many different funds that follow different investing strategies, meaning that almost everyone can find a mutual fund that meets their needs.

One of the most popular types of mutual funds is the target-date fund. These funds reduce their stock holdings and increase their bond holdings as time passes and gets closer to the target date. This makes them an easy way for investors to reduce risk and volatility in their portfolio as they get closer to needing the money,

For example, someone who wants to retire in 2062 might invest their money in a target date 2060 or 2065 fund. In 2020, the fund might hold a 90/10 or 80/20 split of stocks and bonds. By 2060, the fund will have reduced its stock holdings and increased its bond holdings so that its portfolio is a 40/60 split between stocks and bonds.

The Role of Derivatives

Derivatives are designed for advanced investors who want to use more complex strategies, such as using options to hedge their portfolio’s risk or to leverage their capital to produce greater gains.

For example, a trader could use options to short a stock. Shorting a stock is like betting against it, meaning the trader earns a profit if the share price falls. On the other hand, if the share price increases, the trader will lose money.

These are best used by advanced investors who know what they’re doing. Derivatives can be more volatile than even the riskiest stocks and can make it easy to lose a lot of money. However, if they’re used properly, they can be a safe way to produce income from a portfolio or a hedge to reduce risk.


Final Word

A security is the basic building block of an investment portfolio. Most assets that people invest in — like stocks, bonds, and mutual funds — are securities. Each type of security has different features and plays a different role in an investor’s portfolio.

Many investors succeed by investing in mutual funds or ETFs, which give them exposure to a variety of securities at once. If you want an even more hands-off investing experience, working with a robo-advisor or financial advisor can help you choose the best securities to invest in.

Source: moneycrashers.com

The Average Cost of Home Insurance

We’ll get straight to the point: The cost of home insurance varies widely, but the average American homeowner pays $1,249 a year in premiums, according to the Insurance Information Institute’s 2018 figures, the most recent available.

(This is based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. It provides all risks coverage (except those specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written.)

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In this article

Home insurance premiums can vary widely in part because of:

  • Your location
  • Your history of claims
  • Your credit score
  • The age and condition of your home

However, there are ways that homeowners can save money on their insurance costs, which we’ll get into. We’ll also walk through which areas in the U.S. are the cheapest and most expensive, typical coverages and more.

[ Read: Home Insurance Quotes, Explained ]

How much does home insurance cost by state?

As you can see below, the average home insurance premium varies widely by state. As you might expect, weather events figure big in the average annual premium by state, although there are other factors, of course, such as your credit score and the age of the home. The figures in this table come from 2018 data provided by the Insurance Information Institute.

State Rank Average annual premium State Rank Average annual premium State Rank Average annual premium
Ala. 13 $1,409 Ky. 26 $1,152 N.D. 18 $1,293
Alaska 36 $984  La. 1 $1,987 Ohio 44 $874
Ariz. 46 $843 Maine 42 $905 Okla. 4 $1,944
Ark. 12 $1,419 Md. 32 $1,071 Ore. 51 $706
Calif. 31 $1,073 Mass. 10 $1,543 Pa. 40 $943
Colo. 7 $1,616 Mich. 38 $981 R.I. 5 $1,630
Conn. 11 $1,494 Minn. 14 $1,400 S.C. 19 $1,284
Del. 45 $873 Miss. 8 $1,578 S.D. 20 $1,280
D.C. 21 $1,264 Mo. 15 $1,383 Tenn. 23 $1,232
Fla. 2 $1,960 Mont. 22 $1,237 Texas 3 $1,955
Ga. 17 $1,313 Neb. 9 $1,569 Utah 50 $730
Hawaii 27 $1,140 Nev. 48 $776 Vt. 41 $935
Idaho 49 $772 N.H. 36 $984 Va. 34 $1,026
Ill. 28 $1,103 N.J. 24 $1,209 Wash. 43 $881
Ind. 33 $1,030 N.M. 30 $1,075 W.Va. 39 $970
Iowa 35 $987 N.Y. 16 $1,321 Wis. 47 $814
Kansas 6 $1,617 N.C. 28 $1,103 Wy. 25 $1,187

Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides all risks coverage (except those specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written.

Most expensive states in home insurance premiums

Below are the most expensive average home insurance premiums by state, according to the Insurance Information Institute’s figures from 2018. Premiums can vary widely within the state, and of course, there are more factors in your premium than the location of your home.

  • Louisiana: $1,987
  • Florida: $1,960
  • Texas: $1,955
  • Oklahoma: $1,944
  • Rhode Island: $1,630

Cheapest states in home insurance premiums

Below are the cheapest average home insurance premiums by state, according to the Insurance Information Institute’s figures from 2018. Premiums can vary widely within each state, and of course, there are more factors in your premium than the location of your home.

  • Wisconsin: $814
  • Nevada: $776
  • Idaho: $772
  • Utah: $730
  • Oregon: $706

What determines the cost of homeowners insurance?

The cost of an individual homeowners insurance policy is determined by a wide range of factors. Some of those factors are within your control, and some of them are not. 

For instance, home insurance can be more expensive in areas with a high risk of flooding or fires than in places where natural disasters are uncommon. Newer homes often cost less to insure than older dwellings — especially those in need of repairs. Insurance companies also look at your personal credit history before covering your home, so people with good credit histories could receive a lower premium than those with poor credit histories.

Every insurance company calculates rates differently. Some carriers place a higher value on credit score and claims history, while others look more closely at the condition and age of the home. Below is a more comprehensive list of the considerations that might determine your homeowners insurance premium.

[ Read: The Best Homeowners Insurance Companies ]

  • State, city and neighborhood: Some states are more prone to wildfires, earthquakes, and hurricanes than others.
  • Location of home: This information is pulled for crime and claim statistics in your home’s area.
  • Construction of the home: Is the home made out of wood, brick, or vinyl siding?
  • Heating system: Is the home heated with an HVAC or wood stove?
  • Security system: Homes with security systems might be less likely to be broken into.
  • Previous claims on the home: If the home has a history of water and electrical issues, then the homeowner may be more likely to file a future claim.
  • Homeowner’s previous claims: If the homeowner has a history with other insurance companies, he or she may be more likely file a claim again in the not-so-distant future.
  • Credit score: People with low credit scores may be more likely to file a claim.
  • Nearest fire station: The distance between your home and the nearest fire station can be a factor.
  • Marital status: Married couples are statistically less likely to file claims with insurance companies.
  • Replacement cost: The cost to replace an older home and bring it up to code can be more expensive than replacing a new home.
  • Pets: Certain animals might be considered a greater risk for liability claims.
  • Outside structures: Things like pools, sheds or greenhouses can also affect your policy rate.

Aside from these factors, the cost of an individual policy can also be determined by which features you chose to include in your coverage. A few of the options that can affect the cost are:

  • Deductible amount
  • Extra coverage add-ons
  • Bundled insurance policies
  • Discounts

[ More: Complete Guide to Home Insurance ]

Types of coverage

There are many different types of homeowners insurance coverage. Some coverages, like dwelling and liability coverage, can come standard with most policies. But insurance companies also often sell add-on policies that offer protection in certain areas. Here are some of the most common home insurance coverages you might find:

  • Dwelling coverage is insurance that covers qualified damages to the home itself. If the siding of your home tore off in a major storm, dwelling insurance might cover the cost of repairs. Insurance companies might sell add-ons for roof damage, water back/sump pump overflow, flood insurance and earthquake insurance.
  • Personal property coverage pertains to the cost of replacing possessions in your home, such as furniture. If someone broke into your home and stole personal items, personal property coverage might reimburse you. If you need to protect valuables, your agent might recommend you purchase a scheduled personal property endorsement for higher coverage limits.
  • Personal liability coverage protects against lawsuits for property damage or injury. If a delivery driver slipped and fell on your icy driveway, liability coverage might pay for their medical expenses and court costs if they sued you. Some insurance companies offer add-on policies that extend your liability coverage limits.
  • Loss of use coverage might cover additional living expenses you have after your home has been damaged. This might include hotel stays, groceries and gas while your home is being repaired. If your house is under construction after a covered claim, loss of use coverage might pay for your temporary hotel and food expenses up to your policy’s limit.

Generally speaking, your agent may recommend that your home insurance coverages be based on your lifestyle, where you live and the value of your assets.

Keep in mind that your agent may recommend you add coverage as time goes on. If you adopt a puppy six months after you purchase your home insurance policy, your agent may recommend you add pet coverage when the time comes. Or, if you take on a remote job, you can contact your insurance company and see if you should add home business coverage for a small fee.

Every home insurance coverage has a policy limit. A policy limit is the highest amount of money your insurance company will give you after a covered loss. For example, if your dwelling coverage limit is $400,000, that may limit how much is paid out if your home is damaged or destroyed by a covered peril to no more than $400,000, although factors like your deductible may come into play.

When you purchase a home insurance policy, you may be able to set your own policy limits. As a rule of thumb, you may be recommended to have enough dwelling coverage to rebuild your home in its current state, enough personal property coverage to cover the full value of your personal items and enough liability coverage to protect your personal assets.  

[ Read: What is Dwelling Insurance? ]

Reimbursement coverage types

There are three different coverage options commonly provided by home insurance companies. Each option affects your premium differently.

  • Actual cash value (ACV) is based on the current market value, or how much your home and personal property is worth, with depreciation factored in. Most home insurance policies offer ACV reimbursement by default. It can be the lowest option.  
  • Replacement cost value (RCV) works in the same way as ACV, but without depreciation factored in. That means you might get a higher payout after a covered claim. RCV home insurance policies can be more expensive than ACV policies, and you may need to purchase an endorsement to get it. Your agent may recommend this if you own valuables or have an expensive home.
  • Guaranteed replacement cost (GRC) is also referred to as extended replacement cost (ERC), and this option can cover the complete cost of rebuilding the home, even if that cost exceeds the policy limit. GRC can be the most expensive replacement cost type, and not all insurance companies offer it. Your agent may recommend this if you live in areas with extreme weather, wildfires, earthquakes or any place where home destruction is more likely. 

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Discounts and ways to save on home insurance

Homeowners insurance can be costly, so before selecting a plan, shop around to find the best deal based on your needs. It can be helpful to consult an insurance agent, read consumer reviews and check online insurance quotes to find companies with the lowest rates. Here are some other ways to save money on home insurance:

  1. Ask about available discounts: Some companies offer discounted policy rates if your home is in a gated community, if you bundle with your car insurance or if you’re part of a homeowner’s association.
  2. Bundle your insurance policies: Oftentimes, companies that sell home, auto and life coverage may deduct up to 15% off your premium if you buy two or more policies from them.
  3. Make your home safer: Some providers may offer a discount if you install fixtures that make your home safer, such as smoke alarms or a security system, that reduce the likelihood that damage or theft will occur in the first place.

How do past claims impact home insurance cost?

It depends on the nature of the claim. Just how much a claim raises your premium varies in part on the provider and the nature of the claim.

There are also further complications when you make the same type of claim twice. Not only can this increase what you pay each month, but, depending on you and your home’s history, it’s possible the provider may even decide to drop you.

Though your premium may increase if you are found at fault, it’s also possible for your monthly bill to increase even if you’re not found to be liable. Your home may be considered riskier to insure than other homes.

Home insurance cost FAQs

No, states do not require homeowners to get insurance when they purchase a home. However, if you choose to get a mortgage loan, most lenders will require you to have some insurance.

To determine how much coverage you should purchase, talk to your agent about your home inventory, your overall worth, and of course, comfort level. Also discuss factoring in the location of your home, and evaluate risks based on weather, fires and other events that could potentially damage or destroy your home.

There are a few ways to potentially get home insurance discounts. Discount options include things like:

  • Bundling your home insurance policy with another policy (such as auto).
  • Going claims free for extended periods of time.
  • Making certain home improvements.
  • Living in a gated community.
  • Installing a security system.

In 2018, 34.4% of home insurance losses were wind and hail related, 32.7% were fire or lightning related and 23.8% were water damage or freezing claims. Only 1% of claims were related to theft, and less than 2% of losses were liability claims. These figures are according to the Insurance Information Institute.

In Florida the most common claims may be related to hurricanes, wind damage, water damage and flooding. In California, earthquake, flood and wildfire claims may be more common. When you purchase insurance, talk to an agent about the specific risks in your area and ask about separate insurance policies you might need, like flood or earthquake coverage.

We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

Source: thesimpledollar.com

15 types of credit cards

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.

Source: lexingtonlaw.com

10 Characteristics of the Best Growth Stocks (for High Investment Return)

Your investment strategy plays a major role in your profitability, or lack thereof. One of the most popular strategies investors employ is known as the growth investing strategy. The strategy is centered around finding and investing in stocks that have experienced compelling growth in recent history, and tapping into the ongoing growth potential.

But what exactly is a good growth stock?

Characteristics of the Best Growth Stocks

If you’re looking for stocks with incredible growth potential, ultimately hoping to cash in on the upward volatility to generate profits, you’re looking for stocks that display the following characteristics.

1. Stock Price Growth

For a stock to qualify as a growth stock, it has to be experiencing growth in its share price. Without price appreciation, the stock simply doesn’t fall into this category.

So, how do you determine if a stock is on an upward trend?

The easiest way is to take a look at the stock chart.

  • Look at Three-Month and One-Year Stock Charts. It will be clear whether a stock is trending upward when you look at the chart. If the share price has seen relatively consistent upward movement, there’s a strong chance you’re looking at a growth stock. It’s important to look at the chart over the past three months and one year. The three-month chart will tell you whether the trend is currently upward and the one-year chart will tell you whether the growth in the stock has been sustained over a significant period of time.
  • Forgive Dips. Even in bull markets, stocks that are climbing will dip from time to time as investors take profits or digest pieces of news. What you’re looking for is an overall performance in the upward direction, ignoring short-term dips in the data.
  • Compare the Growth to the S&P 500. The S&P 500 index is the primary benchmark of the United States market. By comparing the growth of the stock you’re interested in over the past three months and one year to growth in the S&P 500, you’ll be able to determine whether the company’s stock price has underperformed, performed in line, or outperformed the wider U.S. market. After all, the goal here is to find high-growth stocks that outperform market returns.

After looking at the charts, if you find that the stock has outperformed Wall Street averages over the past three months and one year, chances are you’ve landed on a solid opportunity to beat the market with your investing dollars.

2. Earnings Growth

Sustained gains in the value of a stock will only be possible if the company you’re investing in sustains growth in profitability. Who wants to continue piling money into a company that’s losing it all?

Determining earnings growth is a relatively simple process, thanks to a tool provided by Nasdaq. To access the tool, visit the Nasdaq website and look up the stock ticker you want to research. On the left of any stock’s profile is a link titled Earnings you can click for more details.

The resulting page will have a graph that shows the earnings per share on a quarterly basis over the past year. Look for consistent quarter-over-quarter growth in earnings. Also, pay attention to the earnings surprises. Stocks that have all positive earnings surprises consistently beat analyst expectations — a great sign for a growth stock.

3. Revenue Growth

It’s also important that the stock you invest in has a track record of impressive revenue growth. There are ways to reduce costs to inflating earnings while revenue is either plateauing or falling. These methods will only last so long, and earnings will begin to falter at some point if there isn’t real revenue growth underneath.

So, it’s important to make sure that the stocks you’re interested in are experiencing consistent and compelling growth in revenue.

To determine whether revenue is growing, simply look into the company’s last four quarterly earnings reports. Take note of the revenue reported in each quarter, keeping in mind normal peaks and valleys seen in the sector.

For example, tech companies tend to do best around the holidays, leading to strong fourth quarter revenue. As a result, companies in this space may see a plateau in revenue, or even slight declines, from the fourth quarter to the first quarter, which would be acceptable as long as revenues sequentially rise throughout the rest of the year.

Pro tip: Stock screeners like Trade Ideas and Stock Rover can help you find companies that meet or exceed most of your requirements for things like revenue growth, earnings per share, and other key metrics.

4. Market Growth

You may be noticing a trend here. The key to growth investing is finding a stock with sustained growth across all metrics, but the stock and the company it represents aren’t the only factors you should be paying attention to.

Growth in the addressable market the company you’re interested in targets is also crucially important to its ability to realize sustained gains in revenue, earnings, and ultimately share price.

If a company is beginning to capture the majority of the market it addresses, it may be going through a growth spurt, but that upward movement won’t be sustainable if the market size remains flat. At some point, the company will have saturated the market and will eventually plateau itself.

So, it’s important to look into market data to determine whether the market in which the company operates is growing at a rate capable of supporting continued upward movement in the stock you’re investing in.

To do so, simply go to your favorite search engine and type “(industry) market size” into the search bar and read through the results. In most cases, several statistics companies have performed detailed analyses of the market, determining the current market size and the size the market is expected to achieve over the next several years.

If the company you’re considering is working within a market that’s plateauing, look into how much of the market the company has already penetrated to determine how much more room is left for upward movement.

5. Free Cash Flow Growth

Money flows in and out of businesses like water. Free cash flow represents the net amount of money that flows into a business once all outflows are taken into consideration. This differs from profitability because free cash flow does not measure non-cash expenses such as depreciation.

It’s important to make sure there’s consistent growth in free cash. This can be seen by looking into the company’s balance sheets over the past four consecutive quarters.

6. A Fair Valuation

Growth stocks are notorious for reaching significant overvaluations after big runs higher, resulting in dramatic declines when investors take profits and move on to the next opportunity. While an average valuation is to be expected, risk levels increase when prices fly too high.

One of the best ways to determine if a stock is undervalued, overvalued, or valued fairly is to look at the price-to-earnings ratio, or P/E ratio. A metric commonly used by investors looking for value stocks, the P/E ratio compares the price of the stock to the earnings per share generated by the company over the course of a year.

Every industry will have its own average ratio. By comparing the ratio of the stock you’re interested in to that of the market in which it operates, you’ll be able to determine if the current value of the stock you’re interested in is fair.

7. A Strong Balance Sheet

This has little to do with growth and more to do with general investing due diligence. Any time you buy a stock, you want to make sure that the underlying company has a strong balance sheet.

The balance sheet will clearly outline the value of the assets the company owns as well as the debt it owes, giving you an idea of whether the company is sitting on a strong financial foundation.

8. Clear Competitive Advantages

In order for a company to maintain an upward trajectory, it has to have clear competitive advantages. For example, compare BlackBerry and Apple when it comes to their activities in the smartphone space.

BlackBerry was a clear pioneer, creating some of the first devices classified as smartphones. Over time, competitors came in, taking market share from the company until “BlackBerry” became “Black-What?”

On the other hand, Apple jumped in with a clear competitive advantage. The company consistently innovated new ways to use smartphones, put together an ecosystem including an app store, music service, and more. Apple continues to improve the experience for users of its smartphones to this day, many of whom refuse to switch to other devices despite there being many choices in the smartphone market. As a result, Apple is touted as one of the best growth stocks on the market today.

9. A Solid Management Team

Like a chain, a company’s team is only as strong as its weakest line, and those weak links are sometimes found in management.

When investing in a company, you’re trusting that company with your money, meaning you’re trusting the company’s management team to make moves that will lead to growth.

Why would you trust a team of people you know nothing about?

Before investing in any stock, you should dig into the management team at the helm of the company. How long have members of the team been with the company, and what have they done since taking on their positions? Where did these team members work before, and did their work with previous companies lead to positive outcomes?

These are questions you should know the answers to before you dive in.

10. Forward-Looking Growth Prospects

Finally, before buying a stock you expect to grow substantially ahead, it’s important to take a look at the company’s growth prospects. What is its story for how it will grow and expand into the future?

For example, Gevo, a company focused on the production of clean fuels, is a hot topic among growth investors at the moment. Investors are excited because the company has signed several agreements that will open the door to expanding revenues in the years ahead. Moreover, the company is working to expand its infrastructure to meet increasing demand. Based on the activities taking place at the company, investors are excited about the expectation of meaningful growth in the value of the stock moving forward.

Any growth stock you invest in should have compelling forward-looking growth prospects, such as a plan to enter a new market, a strategy for making their products or services more widely available, or new products in the pipeline.


Consider Investing in Growth ETFs

Finding and taking advantage of growth opportunities in the market can be a cumbersome process, taking quite a bit of time. If you don’t have the time to dedicate to the process, or the expertise it takes to research each and every investment opportunity before risking your money, you may want to consider investing in exchange-traded funds (ETFs) with a focus on growth strategies instead of picking individual stocks.

Although investing in growth-focused funds will reduce the amount of research required, it’s still important to look into each fund’s historic performance, expense ratio, and dividend yield before diving in.


Final Word

Investing in growth stocks has the potential to be a lucrative business. The potential to produce market-beating returns has made the growth investing strategy one of the most popular among retail and institutional investors alike.

As with any other investing strategy however, research forms the foundation of successful investment decisions. Taking the time to dive in deep and make sure the stocks you invest in display the above characteristics will greatly increase your potential profitability.

Source: moneycrashers.com

Home improvement loans

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.

Improving your home might be a goal for many reasons. It can increase the value of the property for more profit when you’re selling or renting it out. Improvements can also make life more enjoyable for you and your family. But they can be expensive—the average cost of a small kitchen renovation is between about $13,000 and $37,500 according to HomeAdvisor, for example.

Homeowners who want to update their homes often turn to financing as a way to pay for improvements. Find out about home improvement loans and whether they might be an option for you below.

How Do Home Improvement Loans Work?

The specific terms of home improvement loans depend on which type you apply for, but the general concept is that a lender agrees to give you a certain amount of money and you agree to pay it back with interest. In some cases, the lender might require that you use the money for a specific purpose that you stated beforehand. In other cases, the funds are provided as a personal loan for you to use as you see fit.

You can get money for home improvement from a variety of lenders, including banks, personal loan companies, mortgage companies and government agencies. You could also tap your credit lines or credit cards.

How much you can borrow and the rates you’ll pay on the debt depend on a variety of factors. Those include your credit history and whether or not you’re putting up collateral such as home equity.

Types of Loans You Can Use for Home Improvements

Personal Loans

Personal loans are unsecured signature loans. That means you don’t typically put up collateral, and with some exceptions, you can generally do what you want with the loan funds. You make monthly payments as agreed upon, usually for a period of a few years.

Pros: You may be able to get a personal loan that doesn’t require collateral such as home equity. That means you don’t put your homeownership on the line with the loan.

Cons: The lack of collateral makes the loan riskier for the lender, which usually means a higher interest rate and overall loan cost for you.

Credit score requirements: You may be able to find personal loan lenders willing to work with someone with little credit history or only fair credit. However, to get decent rates on a large loan, you may need a good or excellent credit score.

Government Loans

You might be eligible for government loans and assistance programs to modify or repair your home. For example, HUD offers information about home equity conversion mortgages for seniors as well as the Title I Property Improvement Loan Program. Some homeowners may be able to borrow up to $35,000 via the 203(k) Rehabilitation Mortgage Insurance Program, and the VA offers some home refinance options for eligible veterans.

Pros: The credit requirements for government programs and government-backed loans tend to be a bit laxer than when you’re dealing with banks.

Cons: These programs might have very specific eligibility requirements and terms that you have to follow closely. For example, you may be required to use the funds for specific purposes.

Credit score requirements: This varies according to program, but you may be able to access some options with less-than-stellar credit.

Home Equity Loans

A home equity loan (“HEL”) draws on the amount of equity in your home. For example, if your home is worth $100,000 and you only owe $70,000, you may be able to get a loan for close to $30,000 based on the equity.

Pros: Home equity loans are secured by the value in your home, which makes them a less risky investment for lenders than personal loans and credit cards. That helps you get a lower interest rate, making HELs typically less expensive than other home improvement loans.

Cons: The loan is tied to your home ownership. If you default on the loan, the lender can force the sale of your home to recoup its losses.

Credit score requirements: You don’t need a stellar score to refinance your mortgage, so you might not need a great score to take out a home equity loan.

Home Equity Lines of Credit (“HELOC”)

A home equity line of credit is a revolving line of credit based on the equity in your home. The terms work a bit more like a credit card than the terms of a home equity loan do. That means you draw on the credit line as needed to cover repairs and pay it back over time. You can draw again on the funds as you pay them back.

Pros: HELOCs can be a flexible source of income, making it easy to manage costs for renovations without running up excess debt. And because they’re secured by the value in your home, they may come with more favorable terms than credit card debt.

Cons: Again, the debt is tied to your home. If you default on the line of credit, the lender can force the sale of your home to get its money back.

Credit score requirements: Credit score requirements for HELOCs are similar to those for home equity loans.

Other Ways to Pay for Home Improvements

Credit Cards

If you have a credit card with a high enough balance, you can put goods and services on it. The downside is that you might pay high interest on that debt. Alternatively, if you have a strong credit score, you might be able to get approved for a new card with a zero percent introductory APR offer. That might let you pay off your home improvement expenses over a year or two without added interest expense.

Cash-Out Refinancing

If your home has equity, you can also consider a cash-out refinance. If you owe $70,000 and your home is worth $100,000, you may be able to refinance and borrow $95,000. (The other $5,000 If your credit is better than when you bought the home or conditions are more favorable, you might even get better rates.

The $70,000 you owe is paid to the bank holding the original mortgage. You cash out the roughly $25,000 left and can use it as you see fit, including repairing your home.

Tips for Getting a Home Improvement Loan

If you’ve decided to pursue a home improvement loan, use these tips to increase your odds of getting the deal that you want.

Have Specific Terms in Mind

Plan ahead rather than reaching for the loan and then deciding what you’ll do. Define your home improvement plan and budget, and consider whether you can get funding for that much money.

Get a Cosigner If Necessary

Consider whether you might need a cosigner. Depending on what type of loan you want to apply for, a cosigner might help if you don’t have great credit or if your income doesn’t meet the requirements of the lender. Keep in mind that the cosigner will also be taking on all the obligations of the debt.

Know Your Credit Score

Finally, check your credit score and credit reports before you apply. Understanding where you stand helps you choose the financial products you’re more likely to qualify for and avoid unpleasant surprises during the application process. Getting a good look at your credit reports also helps you understand whether there are inaccurate negative items bringing your score down. If that’s the case, consider working with Lexington Law to repair your credit and potentially open more home improvement loan doors in the future.


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.

Source: lexingtonlaw.com

15 types of credit cards – Lexington Law

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.

Source: lexingtonlaw.com

What Are Bonds – Basics of Investing in Corporate vs. Municipal Bonds

When building a balanced investing portfolio, you’ll want to include bonds in your asset allocation. These assets provide safety and stability, offering relatively slow growth and reliable returns.

As you begin to research which bonds to buy, you’ll realize there are several different types of bonds,  with the two most common being corporate bonds and municipal bonds.

What’s the difference, and what are the pros and cons that come along with investing in each type of bond? Let’s review the basics of bonds and then look at the two types side by side to help you choose which is right for you.

What Are Bonds?

Bonds are a form of fixed-income security known for providing a relatively safe store of value that are often used to offset risk in a well-balanced investment portfolio. Bonds are essentially loans given to the issuer by the investor, making them a debt instrument.

Investors make money by investing in bonds in one of two ways:

  • Coupon Rates. The most common return on investment derived from bonds is known as the coupon rate, or the interest rate on the bond. As with many other types of loans, the investor pays the full face value of the bond upon purchase and receives interest payments until the maturity date of the bond, at which point their initial investment is returned to them.
  • Premium. In some cases, bonds can be purchased at a discount to their face value. When the bond matures, the investor receives the full face value of the asset, providing a return on investment. For example, an investor may purchase a $1,000 bond for $950. Once the bond matures, the full $1,000 is repaid, leaving the investor with $50 in profits.

What Are Municipal Bonds?

Municipal bonds are commonly referred to as muni bonds, or simply munis. These bonds are issued by local governments, generally on the state or county level, and should not be confused with Treasury bonds, which are issued on a federal level and backed by the full faith and security of the U.S. federal government.

There are two common types of munis on the market today:

  1. Revenue Bonds. Revenue bonds are bonds issued by a municipality that are backed by the revenue generated from a specific project. For example, local municipal governments often issue water and sewer bonds, which are paid back with the revenue collected by the local government for the provision of clean drinking water and sewage services to residents within the locality.
  2. General Obligation Bonds. General obligation bonds aren’t backed by any project revenue. Instead, they’re backed by the taxing authority of the issuers at hand and paid back with tax dollars paid for local income taxes, sales taxes, property taxes, or any other tax revenue received by the local authorities that issued the muni.

What Are Corporate Bonds?

Rather than being issued by a local, state, or federal government, these bonds are debt instruments issued by corporations; they act as loans made from the bondholder to the corporation that issued the security. There are different categories of corporate bonds, including:

  • Collateral Trust Bonds. Collateral trust bonds use collateral other than real estate to secure the bond. For example, a company may secure bond issues with shares of stock, bonds, or other securities.
  • Debenture Bonds. Debenture bonds are corporate bonds that aren’t secured by any collateral. These bonds are generally issued by corporations with the best credit ratings, because companies with poor credit won’t be able to attract investors to these securities.
  • Convertible Debentures. Convertible bonds give the investor the ability to convert the bond into a specified number of shares at a specified time. For example, a company may sell a convertible bond that may be converted into 25 shares of its common stock after two years. Because these bonds can be converted into common stock, they are generally more attractive to investors, but it’s a tradeoff. These types of bonds generally come with low coupon rates.
  • Guaranteed Bonds. Guaranteed bonds are guaranteed not only by the corporation that issues them, but also by a second company. This greatly reduces the level of risk because another company guarantees to step in and fulfill the obligations of repaying the bond if the original borrower defaults.
  • High-Yield Bonds. High-yield bonds, also known as junk bonds, are bonds that have been rated by rating agencies to be below investment grade. These companies generally have significantly high credit risk and must offer higher yields in order to attract investors.

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Key Factors to Consider

There are several factors you should take into account when making a decision to buy either corporate or municipal bonds. Some of the most important of these factors include the quality of the entity issuing the bond, the tax implications, yield, liquidity, and how the money raised through the issuance of the bond will be used.

Here’s how corporate and municipal bonds compare:

Quality of Issuer

One of the first details you should look into before purchasing a bond or any other debt instrument is the quality of the issuer. Bond issuers will have different credit ratings, meaning that when you invest in the securities they’ve made available, you’ll be taking on credit risk.

There are two agencies that provide bond issuer credit ratings: Moody’s and Standard & Poor’s. Moody’s rating scale ranges from C to AAA, with AAA being the best possible rating. Standard & Poor’s follows a scale ranging from D to AAA, with AAA also being the best possible rating.

Higher ratings mean the bond is generally at lower risk of the issuer defaulting. After all, if the entity that issues the security fails to meet its obligations, those who invest in it stand to lose.

Corporate Bonds Come With Higher Default Rates

Corporate bonds are issued by corporations, and every corporation is different. Some make more money than others, some are managed by better management teams, and some will fulfill their obligations consistently while others fail.

Compared to municipal bonds, instruments issued by corporations come with a higher default risk, making it especially important to pay attention to how rating agencies rate the bond in question before you invest.

The good news is that even corporations rarely default. According to the Corporate Finance Institute, only about 0.13% of corporations that issue a bond will default.

Municipal Bonds Come With Lower Default Risk

Municipal bonds are generally an even safer bet than corporate bonds. According to ETF.com, only about 0.08% of munis end up in default. Because these bonds are issued by local governments, entities known for top-notch credit quality, and generally rated AAA by S&P Global, investors can rest assured that they will be paid as agreed in the vast majority of cases.

Tax Implications

Any time you make money — whether from a side hustle, income from your day job, or investment returns — you typically have to pay taxes. However, not all income is taxed equally. Here are the tax implications you’ll need to consider when deciding whether to invest in corporate or municipal bonds.

How Corporate Bonds Are Taxed

Bonds issued by corporations are often called taxable bonds because earnings generated through these investments will be susceptible to both federal income tax and state income tax at the general income tax rate. The exact rate you’ll pay on your returns depends on your tax bracket.

How Municipal Bonds Are Taxed

Gains generated through investments in municipal bonds are always tax exempt on the federal level and are often tax free on the state level as well. The tax exemption is essentially a “thank you” from both federal and local governments for using your investment dollars to invest in projects that support your community.

While in the vast majority of instances, munis are exempt from state and local taxes, there are some cases in which this is not true. For example, if you purchase a municipal bond offered by a municipality other than the one in which you reside, your local authorities may choose to tax returns on that bond at the standard local income tax rate.

For example, if you live in New York City and you invest in a municipal bond issued by a government body in Florida New York City may charge you its normal local tax rate on the returns generated through that investment.

Yields

Returns on bonds are known as yields, and they vary wildly from one to another depending on the credit of the issuing entity, the maturity date of the bond, and other factors.

Generally speaking, here’s how yields compare between corporate and municipal bonds:

Corporate Bonds Generally Have Higher Yields

Local governments are highly trusted entities that are known for maintaining excellent credit. On the other hand, corporations will vary wildly in financial strength and creditworthiness.

Because corporations are usually less creditworthy than governments, bonds issued by corporations generally offer higher interest rates. After all, if the yields on corporate bonds were the same as the yields on government bonds, nobody would lend to riskier corporations. Who would want to buy a bond from a corporation when the same returns can be generated by investing in lower-risk munis?

Munis Provide Small Gains

Bonds issued by the government come with a lower default risk and therefore are the safer option for investors. However, when investing, safer options generally provide lower returns, and municipal bonds are no exception.

The extremely low default risk is considered in the pricing of these bonds, resulting in lower interest rates, smaller interest payments, and lower overall returns.

That is, until you account for taxes. For example, a high income earner may find that investing in municipal bonds is a better fit because they are exempt from state and federal taxes. By contrast, much of the returns on corporate bonds would be erased by taxes for an investor in the highest tax bracket.

Liquidity

Liquidity should always be a consideration for investors, whether they’re investing in bonds or any other asset. Liquidity refers to the ease or difficulty of converting an investment back into cash if desired.

Investors will find it difficult to convert bonds with low levels of liquidity into cash prior to their maturity dates, while bonds with high levels of liquidity are easy to offload and turn into spendable money on demand.

Corporate Bonds Are Often Less Liquid

While any form of bond can be sold on a secondary market, for a bond to be sold, there must be a buyer. In some cases, investments in high-risk bonds and other bonds issued by corporations may become illiquid if no other investors are interested in purchasing them.

Moreover, bond liquidity decreases in general in times of economic and market positivity. During bull markets, investors tend not to want their money tied up in fixed-income assets, instead focusing on the larger potential for returns offered by stocks.

Municipal Bonds Are Highly Liquid

The municipal bond market is very active, with these bonds often being easier to offload than bonds issued by corporations. That’s because muni bonds are issued by entities that are all but guaranteed to cover their obligations while providing tax benefits, making them attractive investments for high income earners.

How Funds Are Used

Investors are becoming increasingly concerned with the way in which their investments are spent. In fact, there’s an entire movement surrounding social impact investing, or investing in assets that use your funds to make an impact for causes you care about.

So, how exactly is your money spent when you invest in these two different types of bonds?

How Corporations Use Money Raised Through Bond Sales

Corporations may be looking to raise money for a wide variety of reasons. Some of the most common are:

  • Working Capital. It costs money to make money, and running a business can be a very expensive endeavor. In some cases, corporations will have their money tied up in inventory, new equipment, and other assets necessary to keep it moving in the right direction and need working capital for general purposes. Companies can issue bonds as a way to raise cash for their operational needs today by promising to repay investors in the future.
  • Acquisitions. Companies often acquire one another, merging two companies into one in transactions where the sum of all parts has a greater value than the original assets. However, acquisitions are expensive business, and corporations often need additional funding to execute merger and acquisition agreements.
  • Research. Research and development are major expenses for just about every publicly traded company on the market today. In some cases, corporations will issue bonds in order to fund this research.

How Municipalities Use Money Raised Through Bond Sales

The vast majority of bonds issued by government agencies are issued to fund public projects.

For example, when a major thoroughfare is riddled with potholes or your county’s library is in need of repair, governments often issue bonds in order to cover the costs associated with these projects. Governments can repay investors either through revenue generated by the project they fund or through tax revenues.


The Verdict: Should You Choose Corporate or Municipal Bonds?

As you can see above, there are several reasons to invest in both types of bonds, with each having its own list of pros and cons. As with any other investment vehicle, each type of bond will be suitable for different investors with different goals.

You Should Invest In Corporate Bonds If…

Bonds issued by corporations are best suited for bond investors who have a relatively low income tax burden and are looking to generate larger gains out of their safe-haven investments. These bonds are best suited for investors who:

  • Are In a Low Tax Bracket. Returns from bonds issued by corporations are taxed at the standard income tax rate, which varies wildly depending on the amount of money you earn on a regular basis. As your tax rate increases, bonds issued by corporations become less attractive than tax-exempt munis.
  • Are Willing to Accept Higher Levels of Risk. Based on historical default rates, corporations are nearly twice as likely to default on bond obligations than governments. As a result, corporate bond investors should be comfortable with a higher level of risk.
  • Want to Generate Larger Returns. Due to the higher risk associated with bonds issued by publicly traded companies, these bonds come with higher yields than bonds issued by governments.

You Should Invest In Municipal Bonds If…

Municipal bonds are worth considering if you’re an investor with a generally low risk tolerance, you’re a high income earner and tax implications mean quite a bit to you, or you’re interested in funding public projects with your safe-haven investing dollars. These bonds are best suited for you if:

  • You’re In a High Tax Bracket. High-income earners are taxed at a higher rate. Because bonds issued by the government are generally tax-free investments, they are well suited for investors who have a relatively high tax burden, acting not only as safe havens, but also tax havens.
  • You Have a Low Risk Tolerance. Municipal bonds are about as safe as investments come. Most local governments have never defaulted and enjoy a high credit rating; investments in these entities are very unlikely to result in default.
  • You’re Looking For a Store of Value. Investments in bonds issued by the government are a great store of value, which is what makes them so attractive as safe-haven investments. Even in times of economic concern, these bonds are known to generate returns rather than losses.
  • You’re Interested in Funding Public Projects. Government bonds are used to fund public projects that improve conditions for the community around you. Not only are these investments capable of generating returns and stability, there’s a feel-good effect involved in making these investments.

Both Are Great If…

If you aren’t in the uppermost income tax brackets, have a moderate tolerance for risk, and are looking to generate greater diversification across your safe-haven investments, you might invest in a mix of corporate and municipal bonds. This approach offers you a balance of the larger gains from corporate bonds and the tax benefits from munis. Investors who would benefit most from a mix between the two:

  • Want Higher Returns While Minimizing Tax Burden. By investing in both types of bonds, you’ll reduce your tax burden compared to corporate bond investments alone while enjoying higher earnings potential than provided by municipal bond investments alone.
  • Have a Moderate Tolerance for Risk. Bonds in general — with the exception of junk bonds — are relatively safe investments. However, some assets within the class are safer than others. Mixing corporate investments into your portfolio of municipal investments will lead to a slight increase in the overall risk level across your portfolio. As an investor, you’ll have to be comfortable with that added risk in exchange for the greater returns.
  • Want High Levels of Diversification. Diversification helps to reduce risk across investment portfolios. By investing in multiple assets across multiple categories, investors don’t have to fear detrimental declines should one, or even a handful, of these assets experience losses.

Final Word

Deciding between corporate and municipal bonds is a decision that should be based on your comfort with risk and your needs for yield and liquidity from your safe-haven investments

It’s also important to consider your returns from a tax perspective. Compare the yields on bonds issued by corporations to those on available munis to make sure the increased returns aren’t outweighed by the taxes you’d pay on your gains.

As is always the case, investors should take the time to research the bonds they’re investing in, considering historic returns, the issuer of the bond, and where the money they’re investing is going. By doing your research before making your investment, you’ll rest assured that they fall in line with your goals.

Source: moneycrashers.com