Charge Cards vs Credit Cards: What to Know before You Apply

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Many people use the terms “charge cards” and “credit cards” interchangeably, but there are specific differences between the terms.

When you use a credit card, you’re postponing for purchases for a defined period of time. When it’s time for you to make your payment, you have the option of either paying the bill in full or paying a minimum amount and carrying over the remainder of what you owe until the next billing cycle and beyond. You pay interest on that unpaid balance for that privilege of extending payment.

There are actually two types of charge cards. The first is a store charge card, which is issued by a retailer and allows you to make purchases only at that store. You may or may not have the option of carrying over a balance each month.

The other type of charge cards are similar to a traditional credit card with one big exception--at the end of each billing cycle, you need to pay off the entire balance. There’s no carrying over some charges and paying interest on them.  

So are you better off with a charge card or a credit card? Here are some other points to consider

Availability: There are hundreds of credit cards available today with a variety of fees and benefits.

Your options with charge cards are more limited. American Express is the most well-known charge card (and the only one available to consumers at present) but Diner’s Club and Chase offer charge cards for businesses. You must have an excellent credit rating to apply for these charge cards.

Most major retailers offer their own charge cards, which can be used only at their stores (or affiliates).  Retailers may also offer a branded credit card that can be used at other merchants as well as their own stores.

Credit limit:  Your spending limit on a credit card is determined primarily by your credit history and your income levels.

Spending limits on store charge cards are determined in a similar way, but those limits are generally much lower than credit card limits.

A charge card like Amex or Diner’s Club theoretically has no limits, since you’re expected to pay off your balance in full each month. You must have a very good credit rating to qualify for this type of charge card.

Rewards:  Credit cards can offer a variety of rewards designed to appeal to a wide range of consumers. You can earn airline miles, cash back, discounts on merchandise and/or special access to certain events.

Although store charge cards don’t generally offer bonus points or money back, they often provide special discounts and benefits like free shipping on purchases made at the company’s website.

Charge cards like Amex offer rewards at least equal to and often better than those provided by rewards credit cards. Because they are primarily designed for businesses, charge cards may also provide access to certain airport lounges and similar benefits that appeal to frequent travelers.

Fees and interest rates:  With credit cards, annual fees and the interest rates on balances carried forward vary with each card. (Late fees are governed by federal law.)

There are many no-annual-fee credit cards in the market today.

With store charge cards, you won’t usually pay an annual fee, but the interest rates on any unpaid balances are generally significantly higher than you’d pay on a traditional credit card.

American Express charge cards and similar cards always have some kind of annual fee, which can range from less than $100 to $450 or more. Since you’re required to pay your balance in full each month, there is no interest rate associated with this card, although you will be responsible for late fees if you miss the payment date.

Impact on credit score: The way you use your credit cards and store charge cards can have a big impact on your credit score. You need to pay on time, make at least the minimum payments and keep your debt-to-income ratio low for the highest scores.

It’s a little harder to predict the effect that American Express charge cards and similar cards have on your credit score. Since there is theoretically no credit limit, credit bureaus may have a difficult time figuring out how to include them in our debt-to-income ratio. But it is important to pay the balances on these charge cards on time if you want to keep a good credit rating.

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