Differences between a Credit Card and a Charge Card

Most people do not realize that there is a huge difference between a charge card and a credit card. It is important to understand how the two work, so that you use them appropriately.

Carry Forward Balance

Whenever you make a purchase using your credit card, you are effectively taking a loan for that amount. You have to repay the company later and you pay an interest for the credit you took. You need to make some minimum payments and you can carry your remaining balance to the next month. This means you do not have to repay the entire debt that you took in that month.

In a charge card, the payment has to be made in full every month. There is no option of carrying your balance forward. There are no minimum payments or interest rates. If you fail to repay the whole amount, then you would have to pay additional fees and penalties.

Annual Fees

You would be charged an annual fee for a charge card as the card issuer does not make a profit by charging you an interest on the carry-forward balance. Charge cards usually have a good rewards point system, which would compensate for the fees to some extent. On the other hand, most of the credit cards do not require an annual fee.

FICO Scores

The biggest advantage of charge cards is that you can make a large number of purchases without affecting your credit score. FICO scores take into account the ratio of utilized credit to available credit. Since charge cards do not really have a fixed credit limit, they are usually excluded while calculating the ratio, due to which a high balance on your charge card would not affect your credit score. The TransUnion FICO score does include charge card balance, but this will also be changing soon.

If you are confused about which card to opt for, then you should look at your personal needs. If you want to carry forward your balance or if you do not want to pay an annual fee, then it is better to get a credit card. On the other hand, if you are sure that you would be making full payment every month and want to avoid spending beyond your limit, then a charge card would be more suitable for you.

A charge card is also the better option when you are worried about credit card debt affecting your credit score.

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