Today most Americans make purchases using cash alternatives. Keeping a wallet full of cash is often inconvenient and may even be risky, and paying by check is time-consuming. Likewise, cash and checks are ineffective for making online purchases because you need access to an account that allows you to make payments electronically. If you’re leery of a traditional credit card and want to develop more disciplined habits with your money, then a charge card may be the perfect alternative for you. Learn what is a charge card and how one is best used to most effectively manage your finances.
Understanding Charge Cards
Before getting this type of card, you need to understand specifically what is a charge card. A charge card is defined as one that incurs no interest but requires that the user pays his or her balance in full upon receiving the statement. To obtain a charge card, you typically need a good-to-excellent credit score. Using this type of card responsibly can have a significant impact on your credit history. Charge cards typically have by the following characteristics:
- User expected to pay the balance in full on the monthly payment date.
- No interest rate charged; however, late fees and annual charges apply.
- No designated credit limit, but users do not have unlimited spending.
Without an established credit limit, the amount that you spend on your card does not factor into your credit use ratio. So unless you fail to make payments in a timely manner, a charge card has no negative impact on your credit score.
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How It Differs from Other Cards
As aforementioned, a charge card does not extend credit beyond the date of payment each month. Likewise, this card has no credit limit. Those characteristics alone make this option different compared to others, but those aren’t the only differences.
Credit cards allow a user to pay off a balance over many months and only charge a small, minimum monthly payment. In return, interest accrues on the unpaid debt and builds up over time. Credit cards have predetermined credit limits and will decline a purchase or purchases and apply penalty fees if you exceed the limit.
Debit cards are another electronic payment option. This type of card is tied directly to your checking account. And, thus, will trigger overdraft fees or rejected transactions if you spend more than you have in your account. Prepaid cards come with specific cash amounts, much like a gift card, and only allow spending up to the specified amount on the card.
Unlike a credit card, a charge card requires that the user pays the balance in full each month – a practice that only 30 percent of all cardholders do, according to the American Bankers Association. Even so, here are a few reasons you need to understand what is a charge card and might want to start using one:
- Establish financial discipline – A charge card helps you be more careful and not spend any more than you can immediately pay back. If you fail to pay off the charge each month, you’ll face a fine of $30 or more depending on your card. The risk of having to pay an extra fee helps users develop better financial discipline. Particularly compared to the traditional credit card.
- Protect your credit score – Because there is no spending limit on your charge card, the balance on it is not considered when your credit score is calculated. Making a charge card an effective way to protect your credit score.
- Get better rates – Because a charge card typically helps boost your credit score, it is also effective for helping you qualify for better interest rates on loans. Paying the charge in full each month will also likely improve your ability to qualify for a mortgage.
- Increase safety – A charge card is a safer option that spending with a debit card, especially online. If a hacker gets your debit card information, he or she may break into your back account. However, with a charge card, there is no imminent risk to the funds in your account.
How to Use a Charge Card
It’s important to understand what is a charge card and how it is handled differently than a debit or credit card when it comes time to make a purchase. Understanding these differences will help you know how to best use this type of card.
When using your charge card, it’s important that you are aware of the amount you are able to pay in full when the monthly payment date arrives. It is also crucial to have a good handle on your finances if you are using your charge card. Otherwise, you could incur significant fees and additional charges.
It is most effective to use your charge card when you are:
- Shopping online – A charge card is much safer than a debit card when shopping online. This is because you don’t run the risk of a hacker gaining access to your account and funds. Additionally, a charge card will help prevent you from spending more than you can pay. Such as is the case with a debit card.
- Making large or electronic purchases – Many card companies offer warranty protection for large purchases made with your charge card. Those warranties typically go beyond what is provided by the manufacturer and offer you extra coverage. Which is especially important for electronics, appliances, and other significant investments.
- Traveling or on vacation – If you’re away from home, using a debit card can present a significant risk. A charge card typically comes with the added protection of fraud coverage. So you won’t be liable if someone steals your card number.
While a charge card typically is an effective option, particularly compared to other plastic payment types, it’s important to understand what is a charge card and the fine print associated with the card. For example, most charge cards have significant annual fees. The first year is often complimentary; however, successive years may be anywhere from $100 to $500. Take note of the fee associated with the card you choose up front.
Likewise, a charge card can help you become more disciplined with your finances and even improve your credit score. But if you fail to pay your balance on time, it can be detrimental. Not only that, but you will also be charged some hefty late-payment fees.
A charge card is a convenient way for you to pay for purchases without cash or checks if you have a good-to-excellent credit score. While some cards have high annual fees, you don’t have to worry about interest. This is because you have to pay the balance in full each month. Before settling on a charge card, take the time to really understand what is a charge card. And how you can best use it to support your financial goals. This type of card is not for everyone, but for the right person, it presents significant advantages.