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If you’re looking to add some new plastic to your wallet, and are debating between a charge card and credit card, it’s important you first understand the differences between them so you can decide which one is right for you.
To start, a charge card typically requires you pay the balance in full each month, whereas you can carry a balance from month to month on a credit card. Also, charge cards don’t tend to give you a credit limit, whereas the majority of credit cards do.
Why Does Payment Schedule Matter?
As we mentioned, a charge card requires payment in full each time a statement arrives. This means you won’t have an interest rate paired with a charge card, as you can’t carry a revolving balance. This can be a good thing, especially as this can help foster good habits of repayment, ultimately helping you improve your credit scores. (Payment history is the biggest influencer of your credit scores, accounting for 35% of your scores.)
It’s important to note that there is often a late fee with charge cards, so if you don’t make that required payment on time, you can get penalized. For the specifics on what fees a card you’re considering carries, you’ll want to read the fine print that accompanies it.
With a credit card, there are minimum monthly requirements, but you’re able to carry over balances. Having a balance you can take time to pay may help you budget to get the item paid off. However, you’ll ultimately spend more because of interest charges. It’s possible to determine how much extra money you’ll be charged by looking at the annual percentage rate (APR) tied to your credit card. If you use the card to make a large purchase you want to pay off over time, you may consider a credit card with low interest rate or even a 0% APR credit card. Just remember, it’s a good idea to get the balance paid in full before the introductory rate expires, or else you’ll rack up interest charges.
Do I Want (or Need) a Credit Limit?
More often than not, credit card issuers give cardholders a credit limit, typically deemed by their credit scores (more on that later). Credit limits can be both a good and bad thing, as they limit you on what you can spend on a card. If you need to make a large purchase (one you can afford, of course) and it exceeds the credit limit you have on your card, you’ll either need to pay part in cash, use a different card, or find an alternative solution, which can be frustrating. However, having a credit limit can help prevent you from overspending and getting yourself in financial trouble. Take a look at your budget and see what you think will work best for you.
What Is a Store Charge Card?
Many retailers have their own store-specific charge cards, some of which are only allowed to be used at those establishments. However, there are some that can be used wherever that brand of card (Visa or MasterCard, for example) is accepted. If you frequently shop at this particular store, and the card offers a reward program or some sort of discount, a store card may be worth considering.
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Generally speaking, these types of cards are easier to get, so if you have a thin credit profile or are working on rebuilding your credit, this may also be a good option. Just like with any other type of card, it’s important you use this card responsibly, or else it could end up doing more harm than good.
How Do These Cards Affect My Credit?
When you apply for either of these cards, a hard inquiry will be placed on your credit profile and ding your scores slightly. Because of this, it’s a good idea to review your credit scores ahead of time to get an idea of where your credit stands and what types of cards you may qualify for. You can see two of your credit scores for free on Credit.com.
Once you have the card, the way you use it is what will affect your scores. As we mentioned, payment history is the largest influencer of your scores, so your habits there will play a major role. From there, your credit utilization (how much debt you have in relation to your credit limit) has the next largest impact. Experts recommend keeping your debt levels at 30%, ideally 10% of your limit.
How Do I Choose Which Is Right for Me?
Each card type has advantages and disadvantages, and each can be a component of a healthy, responsible budget. You simply need to use the information above, check your credit and review your budget to see which one would be the best tool for your particular situation.
Laure Justice also contributed to this article.