Do you think that your credit cards are charge cards or that all your charge cards are credit cards? Then you’d be wrong. These terms may be used interchangeably but they’re not the same thing. In fact, a charge card is a kind of credit card but not all credit cards are really charge cards. If this confuses you, you’re not alone. Almost all consumers think that the two are the same.
What you need to know
You can make purchases with charge cards but they’re different than credit cards in that most of them require that you pay your balance owed each month when you receive your statement. In other words, there’s no revolving balance from month to month. So with a charge card there is never an interest expense. American Express and Diners Club are examples of charge cards. Both require you to pay off your balance owed each month but the trade-off is that you never pay any interest.
No credit limit
Another important difference is that there is no credit limit on a charge card. However, this doesn’t really mean that you can charge as much as you want. As a general rule, the amount you can charge adjusts with the way you use your card, your history of payments and your financial resources. In other words, you might begin with a purchasing power of $1,000 but then progress up to $5000 or even more as you demonstrate an ability to handle the card responsibly.
You’ll need a good credit score
If you want to get a charge card, you will need to have a good or excellent credit score. FICO, which used to be called the Fair Isaac Corporation and that developed the credit score, says it won’t harm your score to charge purchases on a charge card. This is due to the fact that balances on charge cards are not included in the way your credit usage is calculated because they have no credit limits.
How to determine your credit score
Your credit score is that little three-digit number that follows you around and that lenders immediately check out when you apply for a charge card or credit card. You can learn what your credit score is by going to the website, www.myfico.com. You can either pay $19.95 or get it free if you sign up for a free trial of the company’s Score Watch program. A good credit score is 700. However, the best credit rates go to people with scores of 770 or better out of a possible 800.
You can still get rewards
It isn’t just revolving credit cards that come with rewards. You can earn travel discounts, complementary travel insurance and other benefits with a charge card. However, these cards almost always come with an annual fee that may be higher than you are paying for your credit cards. In fact, your annual fee could be $100 or more. You will also have to pay extra fees for special services. And if you’re late in making a payment, you will probably have to pay a penalty fee.
Which will be best for you?
Should you have a credit card or a charge card? The answer to this question depends largely on your personal preferences and your finances. If you are in good shape financially and don’t feel you need revolving credit, then a charge card might be an ideal solution – keeping in mind that you will have to pay your balance owed each month. If you don’t mind the idea of paying interest and like the flexibility of being able to carry balances forward, a credit card might be better. Of course, there’s nothing that says you can’t carry both. You could have an American Express card for travel and a Visa or MasterCard for everyday purchases. The nice thing is that it’s all up to you.