~Credit and Credit Cards~

[xero90]

The Difference Between Credit Cards and Charge Cards
Both include fees and offer rewards, but one can severely hurt your credit score.

http://money.usnews.com/money/blogs/my-money/2015/02/02/the-difference-between-credit-cards-and-charge-cards

A new study found young adults are more responsible credit card users than middle-age borrowers.

If you tend to max out your credit cards, but always pay your bills in full, a charge card might be a better option for you.
By Lindsay Konsko Feb. 2, 2015 | 8:45 a.m. EST + More

When it comes to paying with plastic, credit cards aren’t the only game in town. If you’d like to build your credit score while reducing the risk of getting in debt, you might want to consider a charge card.

While similar in some ways, charge cards and credit cards each offer unique features. Here’s what you need to know.

Credit Cards vs. Charge Cards: Similarities

In general, credit cards and charge cards function alike. Both operate on a line of unsecured credit that’s been extended to you by the card’s issuer. Essentially, you’re taking out a short-term loan from the issuer every time you swipe, and you’re expected to repay this loan by the end of the month.

Note: This is how charge cards and credit cards differ from debit cards, which simply withdraw money from your checking account when used. Debit cards don’t run on a line of credit at all, and therefore won’t help you build your credit history.

Charge cards and credit cards are also comparable when it comes to rewards. Depending on which one you choose, you could be earning points, miles or cash back on every dollar you spend with your card.

Both types of card assess similar fees. These might include annual fees, late fees or foreign transaction fees, depending on the card you select.

Credit Cards vs. Charge Cards: Differences

Finding the main differences between credit cards and charge cards requires a little digging below the surface. While not very noticeable day-to-day, there are two key distinctions.

First, credit cards typically come with a preset spending limit. The cap depends on the type of card and your personal financial situation. Your credit line might rise over time, but there’s always a limit to the charges you can put on the card.

Charge cards don’t come with a predetermined limit. Although the issuer might put some boundaries on your spending with the card, this isn’t set when you’re approved. For folks who do a lot of charging, this provides flexibility.

But here’s where the other important difference comes in: You can’t roll your balance from month to month with a charge card like you can with a credit card. Charge cards require customers to pay in full every month or face a fee. As a result, you’ll never have to worry about paying interest on your balance.

In contrast, with a credit card, you only have to pay the minimum balance to keep your account in good standing. If you’re short on cash one month, you can choose to pay off the remainder of your charges the next – with interest, of course.

How a Charge Card Impacts Your Credit Score

Aside from forcing you to budget, there’s another implication behind charge cards’ lack of a preset spending limit: Your credit score will be affected differently.

Thirty percent of your score is determined by how much you owe, and a factor that heavily influences this is your credit utilization ratio. This is the amount of credit you have in use on your credit card compared with your overall credit limit; if this ratio creeps above 30 percent, you should expect your score to suffer.

But remember, charge cards lack a conventional credit limit. Consequently, the algorithm used by FICO, a company whose credit scores are most widely used, looks at them differently.

“With respect to the credit utilization ratio, charge cards are excluded from the calculation,’’ says Ethan Dornhelm, principal scientist at FICO.

This means the amount you’re spending with a charge card won’t have nearly as much impact on your FICO score as it would with a credit card. For people who run a high balance each month, this is convenient. They won’t have to constantly worry that a high credit utilization ratio is banging up their credit.

However, charge cards will affect your FICO score in other ways. These include payment history (35 percent of your score) and length of credit history (15 percent of your score). By getting a charge card as soon as you can and making on-time payments every month, you’ll build a solid credit profile.

The same goes for credit cards. Just keep in mind that you’ll also have to watch your credit utilization ratio carefully.

The bottom line: If you always pay your credit card in full at the end of the month and find it burdensome to have to worry about bumping up against a credit limit, a charge card might be for you. But if you like the option to roll a balance from month to month, a credit card is a better choice. Both are a good choice for building your FICO credit score, but in slightly different ways.
Ads by ZINC