5 Good Reasons to Get a Charge Card
There's one piece of plastic that might actually help you become a more disciplined spender: a charge card.
Unlike a credit card, which lets you make a minimum payment each month and then pay interest on the balance, a charge card requires you to pay the balance in full every month. That’s something that only 30 percent of all card holders do, according to the American Bankers Association.
Here's why you may want to opt for a charge card:
1. Using a charge card makes you financially disciplined. Even if you’re good at paying off your credit card balances, a charge card forces you to be even more careful not to spend more than you can immediately pay back. If you fail to make a payment, you’ll face a fine—American Express, the biggest provider of charge cards, will levy a $27 to $37 penalty depending on your balance. While you could opt to pay your credit card bill in full, the siren song of a revolving credit line has lured many Americans into running up more than $945 billion in outstanding credit card balances at very high annual interest rates, according to data from the Federal Reserve. That won’t happen with a charge card.
2. It won’t hurt your credit score. Charge cards balances are not considered when FICO, the most widely used credit score created by the Fair Isaac Corp., calculates your credit utilization rate—a measure of how much of your credit limit you’ve used. Also, because there is no preset credit line on charge cards, FICO doesn't include a credit limit either, says Ethan Dornhelm, senior director of scores and analytics at FICO. But since charge cards need to be paid every month in full, FICO does take that timely payment into account, which can boost your credit score.
3. It could help you get a lower interest rate on loans. Because a charge card can help boost your credit score, it can also help you to qualify for better interest rates on, say, a mortgage, than if you only had a credit card that carried a balance. Paying in full may also improve your ability to qualify for a mortgage, says Craig Crabtree, general manager of Equifax Mortgage Services.
4. A charge card is safer than some other cards. While it provides all the consumer protections of a credit card, it is less risky than, say, a debit card. If a hacker gets your debit card, there's a risk that he could break into your bank account. But if he gets your charge card, there's no risk to the safety of the funds deposited in your account.
5. You can get credit too—in an emergency. If unanticipated circumstances interfere with your ability to pay in full, American Express offers a payment program it calls Pay Over Time. If you are accepted into the program, you can pay your charges back as if it were an installment loan, with interest charged.
Charge-Card Caveats
Charge-card annual fees can be steep. While the first year is free, the American Express Green Card costs $95, the Gold Card costs $160, and the Platinum Card runs $450 per year.
Also, though charge cards can help you become more fiscally disciplined and even help you improve your FICO score, if you fail to pay off your balances on time, the high late-payment fees can be very costly.
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