“Paper or plastic?”
“Cash or credit?”
“Credit or charge?”
When it comes to how you spend your money, the first two questions may seem like no-brainers. Debit cards and cash can be great budgeting tools for those dealing with debt woes, while credit may appeal to disciplined spenders looking to build credit or earn rewards on their purchases. The last one, however, may give a more than a few folks pause:
What’s the difference between a credit card and a charge card, anyway?
Here’s what to know if you’re thinking about applying for a charge card.
1. You’ve Got to Pay That Balance Off in Full
The major difference between a credit card and a charge card is that the latter requires you to pay your balance off in full each month. Credit cards, on the other hand, let cardholders revolve a balance; so long as you make the minimum payment each month, your account will be considered in good standing, and you won’t be charged a late fee or slapped with a penalty annual percentage rate (APR).
Now, depending on your spending habits, the “pay in full” facet of charge cards can be a blessing — there’s more incentive to keep your spending in check, given the monetary and credit score consequences of having an account in default. Or it can be a curse, because …
2. You Probably Won’t Have a Pre-Set Spending Limit
That’s not to say you’ll be able to charge up a storm right off the bat. A charge card’s purchasing power generally adjusts to your card use and credit history. But the lack of a definitive credit limit is something to keep in mind if you are concerned with overspending — or having the card unceremoniously denied because your issuer has decided you’ve hit your limit.
3. You May Have Options If You Run Into Trouble
If you do run up a balance you can’t afford to pay in full, it’s a good idea to call your issuer. Some charge cards have extended payment programs in place that can help you avoid default. (Note: You should expect to pay interest on the charges you are allowed to revolve.)
4. They Likely Carry an Annual Fee
Seeing as you don’t intend to carry a balance, charge cards typically have an annual fee. (The issuer essentially isn’t banking on you paying interest.) And that fee may or may not be worth paying, depending on your spending habits and whether the card has a rewards program. Having said that …
5. Some Charge Cards Have Perks
Some charge cards do let cardholders earn points on their purchases and even tout ancillary benefits, like roadside assistance, car rental insurance, extended warranty or purchase protection.
6. They Can Affect Your Credit Scores Differently
Both credit cards and charge cards will appear on your credit report and count toward your payment history and credit age (two major components of credit scores). But many scoring models do not include charge cards when calculating your credit utilization — how much debt you owe versus your total available credit limits. This is essentially because charge cards are an open line of credit — remember, they typically require payment in full within 30 days after the statement date and have no established credit limit.
Now, that doesn’t mean a credit card is necessarily better for your credit scores. It would all depend on whether or not you were carrying balances on that card and any other cards in your wallet. (Experts generally recommend keeping the amount of debt you’re carrying, collectively and on individual cards, below at least 10% of your total limit, and ideally 30%, for better credit scoring results.) In any event, it’s important to note …
7. A Charge Card Will Help You Build Credit
So long as, of course, you use them responsibly. As mentioned previously, your charge card will factor into your payment history and the age of your credit accounts, so if that account is in good standing, it should help your credit scores over time.
Remember, it’s important to read the terms and conditions carefully to make sure any piece of plastic you’re considering is right for you. And, whether you’re opting for a “charge” or “credit” card, you’ll want to check your scores ahead of time because your credit will determine whether or not you qualify for a specific product. (You can see where your credit currently stands by viewing two of your credit scores, updated every 14 days, for free on Credit.com.)
More on Credit Cards:
- Credit.com’s Expert Credit Card Shopping Tips
- How to Get a Credit Card With Bad Credit
- An Expert Guide to Credit Cards With Rewards