When it comes to choosing between credit cards and charge cards, it can be confusing to determine the difference and which one is the best type of card for you. According to the Federal Reserve Bank of Boston, in 2014, the average American card holder had four types of credit cards. The data shows these include 2.4 general purpose credit cards, 1.5 merchant-branded cards and 0.2 charge cards. It is apparent from this data that the majority of Americans choose general purpose credit cards, but it’s important to know when it would be beneficial to use charge cards instead of general credit cards.
Equifax credit scores range from 280 to 850, and you generally need a very good credit score (between 725 and 850 on Equifax’s credit score scale) to qualify for a charge card. This is not always the case with traditional credit cards, although you may pay higher interest fees if you have a poor credit score. A recent article on the Equifax Finance Blog, “Charge Cards vs. Credit Cards: What’s the Difference,” discusses in greater detail the pros and cons of both credit and charge cards.
Traditional credit card
To understand how a charge card differs from a credit card, you must first understand how a credit card works. Traditional credit cards have a credit limit which determines how much a user is able to charge in a billing period. Credit limits for users differ based on lender policies; for example, some credit card issuers will use a customer’s credit score and/or borrowing history to determine the user’s credit limit.
A billing period for a credit card generally consists of a 30-day cycle in which you can use the card to make purchases throughout the month and be billed for them at the end of the cycle. When you receive your bill at the end of a billing cycle, you have the option to pay off your debt in full or, if you do not have all of the money to pay off your bill, a credit card agreement allows you to make a minimum payment and carry the rest of the debt into the next billing cycle with additional interest fees. This is why credit cards are often referred to as revolving accounts: they allow you to carry a remaining balance from month to month.
It is important to note that credit limits on traditional credit cards play an important role in your credit score. They help to determine the credit utilization ratio, which compares the amount of credit used to the amount of credit available. Using 100 percent of the available credit to you, known as “maxing out your credit card,” can negatively reflect your borrowing history. Your credit utilization ratio accounts for 30 percent of your credit score.
Charge cards
Similar to credit cards, charge cards allow you to make purchases with your card that you will then be billed for at the end of a billing cycle. One of the biggest differences between credit cards and charge cards is that charge cards do not have a credit limit and can be used for large purchases. Instead of a credit limit, charge card purchases are approved based on your payment history, income and credit score.
Another one of the biggest differences between credit cards and charge cards is that charge cards do not allow you to carry a balance over from one month to the next; instead, the total balance at the end of a billing cycle must be paid in full. Because of this, charge cards do not have interest rates that you acquire from not paying off your debt like credit cards do, but you could incur penalty fees for not paying off the full balance on your charge card. It is also important to note that racking up a large balance on a charge card may not negatively impact your borrowing history because of the fact that they do not carry credit limits.
If you want to know more details on how credit card and charge cards differ, read the full article on the Equifax Finance Blog.