Ask an Expert: Should I Consider a Charge Card Instead of a Credit Card?

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This post comes from Jason Bushey, who writes about personal finance and credit cards daily on Creditnet.

I recently received the following question from a Money Talks News reader:

I’ve been thinking about applying for a charge card, and wanted to hear your thoughts on how these cards differ from standard credit cards and whether or not they’re worth considering. I almost never carry a balance, my credit score is in the low 700s, and I’m extremely diligent about making my payments on time each month. — Kevin S.

My response

This is an excellent question. I’ve heard many consumers refer to standard credit cards as “charge cards,” but the truth is, these two kinds of cards are actually quite different – mostly in terms of monthly payments and credit limits.

With charge cards, the full balance is due at the end of each billing cycle. So whatever you spend during that cycle, you’re required to pay that in full before the date due. If you fail to make the full payment, you’re liable to incur a sky-high penalty interest rate, which varies depending on the card.

There’s also no credit limit on these cards, so the degree to which a cardholder can exceed his or her monthly budget is slightly more heightened. There are, however, spending limits attached to charge cards, despite the fact that they’re not preset (as you’ve probably seen advertised).

For example, American Express allows you to charge only what it has determined you can pay back at the end of each billing cycle. AmEx has been known to notify cardholders that they’ve reached their limit and that it won’t approve any new purchases until the balance has been paid off, which is actually an excellent way to keep monthly purchases in check for both the issuer and the cardholder.

So there are certainly some pros and cons to consider when it comes to charge cards. But if you use the card responsibly and make on-time, in-full payments each month, there are few ways to pay that are more lucrative than a charge card. The reward programs attached to these cards are extremely generous and the member perks are numerous.

Before you determine whether or not these cards are right for you, here are some factors to consider:

Do you carry a balance?

This is the No. 1 factor you should consider before applying for a charge card. If you do carry a balance, be it small or large, then you may want to rethink charge cards and stick with the standard credit card option.

Again, failing to pay your total charged balance on time and in full can lead to a strict penalty APR, not to mention a late fee that can go as high as $35. If you regularly carry a balance, then perhaps the risk of a charge card outweighs the rewards associated with them.

Your credit scores

Charge cards are generally reserved for consumers whose credit scores are in the very-good-to-excellent range. People with low scores are on occasion approved for these cards, but overall if your credit score is just average you may want to avoid applying for a charge card.

That said, consumers who are approved can build their credit scores with use of a charge card. Despite the fact that there’s no set credit line attached to these cards, most charge cards (including those issued by American Express and Chase) report monthly payments to the major credit bureaus. Plus, a charge card adds another account to your credit profile, making it a potentially beneficial tool to improve and maintain an excellent credit score.

MyFICO says, “Charge cards can be just as effective as any other credit product in helping consumers establish a credit history. Whether you have a credit card or a charge card, the most important factor in building or improving your FICO score is using credit responsibly.”

Annual fees

Charge cards carry some of the highest annual fees of any cards on the market. On the high end, the Platinum Card from American Express charges an annual membership fee of $450.

But that exorbitant annual fee doesn’t come without some member perks, financial and otherwise. Members can earn 25,000 Membership Rewards points after spending $2,000 in the first three months of card membership, they can enroll to earn a $200 credit annually for airline fees like checked bag and flight change fees, and they’ll enjoy access at participating airport clubs.

Essentially, there’s a reason this card costs so much to carry, and if you’re a high-end traveler it could easily pay for itself over a few months of frequent flying and responsible spending. Then again, if that’s not you, paying such a high annual fee is hardly worth your while.

The bottom line

There’s no doubt that charge cards are beneficial for a certain type of consumer. If your credit score is considered excellent, you never carry a balance (or even dream of it) and you’re willing to pay a little bit more for the chance to earn a lot more, then a charge card is certainly worth considering. Like all cards, just make sure you know the terms and conditions ahead of time before applying.

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