Not that long ago, the most common way for a customer to pay using credit was by ‘charging it’. But today, you are more likely to hear, “Put it on my credit card.” Many people use the terms interchangeably perhaps not realizing that there are important distinctions between the two ways of borrowing. Merchants don’t care which option you use because their costs are the same either way. But it’s important for consumers to understand how each works to avoid wasting time and money.
Most of the benefits that are available to charge card holders are also included in credit card agreements. For example, travel accident insurance, extended warranties, purchase protection features can be found on both charge and credit card agreements. Federal law requires that the terms and other important information for both types of cards be clearly stated and easy to compare. The amount of interest you’ll be charged for using a credit card or the fees for the privilege of using a charge card will be easy to compare to help you choose which of the two best meets your needs. Here is the information you’ll need to help you decide:
A credit card is an account with a spending limit that allows you to make purchases that can be paid for over time. In return for allowing you the privilege of borrowing the money, the credit card company will charge interest every month you carry a balance on the account. There is a minimum payment due each month; either pay the account off in full or continue to use the funds for whatever you need and carry a balance. Federal law mandates the following information be included in your monthly statement:
• Annual percentage rate for purchase and how it is determined
• If there’s an annual fee and how much
• Amount of the minimum finance charge
• Fees for transfers, cash advances, late payments and exceeding the credit limit
• Due date of payment
Borrowing on credit can be a double-edged sword, if you’re not careful. While having the option to buy the things you need but can’t afford may be appealing, the danger lies in accumulating so large a balance as to struggle to make the payment. So always keep in mind that the best credit card strategy is to be prepared to pay off the balance each month. But in those cases when that isn’t possible you have the comfort of knowing the lender is covering the balance until you can pay it off.
A charge card, on the other hand, is a type of credit card that differs from the traditional way of borrowing in that they do allow you to make payments over an extended period of time. You have the opportunity to borrow to make purchases, but the balance is to be paid in full each month. There is no balance carried over from month to month and in return for the privilege and to compensate the issuer, an annual fee will apply. Charge cards usually offer better rewards than a regular credit card and there are no charge cards for people with bad credit. Federally mandated disclosures also include:
• Transaction fees for purchases, whether specific dollar amount or percentage
• Fees for cash advances, paying late or exceeding the credit limit
• Amount of annual renewal fee
Many people use charge cards because they force more disciplined spending than credit cards. Borrowing with a charge card means no paying later. There is no pre-set spending limit on charge cards, although that doesn’t mean unlimited spending. If the balance is not paid in full by the due date, further purchases cannot be made with the card. Your purchasing power adjusts with how you use the card, your payment history, and financial resources.
Impact on Credit Score
When it comes to increasing your credit scores, credit cards have an edge over charge cards. Aside from the fact that charge cards are not revolving accounts, they also lack a credit limit. The spending limit on credit card is an important component used to calculate your credit score and is beneficial because it raises your debt-to-asset ratio, sometimes called debt utilization. The ideal debt utilization percentage should be as low as possible, but a ratio that demonstrates you’re using less than twenty percent of your entire credit limit is most helpful.
Both types of payment systems will help improve your score, if you follow two important rules. First, the longer you’ve been using credit the better your score will be and the second factor is how well you’ve managed paying your credit accounts.
The bottom line is that there are viable reasons a consumer might choose one option over the other. By comparing the terms and conditions of each type of card and doing the math, you can calculate the actual cost in your particular situation to help you make the best-educated decision to meet your needs.
A staff writer at ASAPCreditCard.com, Noreen Ruth is a regular contributor to a wide variety of financial-related blogs and websites. She specializes in credit and debt-related issues, and provides useful information to help consumers choose the right credit cards and make prudent financial decisions. Follow her regular posts on the ASAP Credit Card Blog to stay up-to-date with the latest credit card news, reviews, information and more.