What kind of credit card user are you?

Financial institutions, such as banks and credit unions, categorize credit cardholders as transactors, revolvers, and emergency users. Each of these types of cardholders needs something different from his or her credit cards, and it helps to know your needs before you go hunting for plastic.

Emergency users are precisely what they sound like. These are people who carry a credit card for when something goes wrong, such as a car repair that can't wait until the next paycheck, or as an alternative to buying a new sofa on time payments. Emergency users don't usually carry a balance on their cards, but when they do, it may take them several months to pay it off, although some of these cardholders are so concerned about falling into the compound interest trap that they'll scrimp and save to pay off the balance entirely within days of the statement's arrival.

Revolvers are more typical of credit cardholders. These are the people who, for whatever reason, tend to carry a balance on their plastic from month to month, accumulating interest charges and basically financing much of the industry. Some revolvers are able to keep their credit card balances within their budget and their ability to pay; others, unfortunately, see their balances balloon, sometimes because of a financial crisis such as a sudden loss of income, or because they can't control their spending. The danger signs these people should watch for include making only the minimum monthly payment for months on end, and taking a cash advance from one credit card to pay another's bill; when that point is reached, finances are out of control.

Transactors are the exact opposite of revolvers. These people charge everything to their credit cards-utility bills, groceries, gasoline, a hamburger at a fast food joint or a cup of coffee at the deli counter-but they pay the entire bill before it becomes due, avoiding interest charges entirely. Floating all of their transactions on a credit card allows their own money to earn interest as long as possible, before they must use it to discharge the loan. Transactors reap all the benefits of these powerful financial tools-including rewards programs, cash back, and free frequent flyer vacations-without incurring any of the costs.

Of course, people's spending habits change over time, moving them from one category to another. Revolvers pay off their credit card balances and throw a card-cutting party, saving one either for emergency use or for monthly transacting, while transactors tire of the point-chasing game and become emergency users or miscalculate their ability to pay and become revolvers.

Obviously, such different spending habits require different credit cards for maximum efficiency. Emergency users, for example, may carry a card for years without ever flashing it near a terminal. These people shouldn't care all that much about an interest rate they prefer never to use; instead, to get the greatest value from a card, they need one without an annual fee, so they aren't paying simply for the privilege of having a piece of plastic in their wallets. Most banks offer a basic credit card without an annual fee, so this sort of offer is not difficult to find.

Transactors also care nothing for the interest rate, as they never pay interest charges. They mainly want the float provided by the credit card, but are also happy to take the rewards offered. Their search for the perfect card is actually the search for the longest statement period, called interest free days, and for the reward program containing the goodies that most excites them, be that electronic gadgets, cash back on their gasoline purchases, or experiential rewards such as a golfing package that includes putting lessons with Tiger Woods.

Revolvers, on the other hand, should care very much about their interest rate, as this is what keeps them behind the eight ball. Compounding interest is so powerful that it's worth any amount of time spent combing banks' websites to find the credit card-or better yet, a personal loan-with the lowest possible rate valid over the longest length of time, to transfer and consolidate all of one's balances under that rate, and then to concentrate on paying off that balance as soon as possible. Revolvers cannot achieve financial freedom without breaking the compound interest trap, and the key to doing so is to lower the interest rate and raise the monthly payments to discharge the principal of the loan rather than continuing to pay accruing interest charges.

So the next time you're shopping for a new credit card, take a long look at your own spending habits, and select one that's best suited to serve your needs-not the bank's.