Charge cards versus credit cards versus debit cards

creditIf you need to use credit but don't want to impact your credit score, you may want to apply for a charge card rather than a credit card.

If you've found yourself paying frequent overdraft fees when using debit cards, or finding your checking account tied up waiting for the bank to correct an error from your debit card usage, charge cards may also be the answer.Both FICO and the new Vantage Score, which is used by the three credit reporting agencies, no longer use charge card balances in their utilization calculations. That means if you have a high balance on a charge card, it won't count against your credit score.

"Charge cards are a great way to build up your credit score. They are very different than a credit card (although they are sometimes used synonymously), since you have to pay off the entire balance each and every month," says Bill Hardekopf of in an e-mail interview.

"They're a much safer way to use a 'card,' " he continues, "because you can't run up any debt using the charge card. Obviously this is not the case for a credit card."

The pure form of a charge card doesn't let you run up any debt, but today there are charge cards that allow you to use flexible payment plans. For example, American Express gives eligible charge card holders the ability to designate certain transactions as those that will be paid over time. The balances to be paid over time, called revolved balances, do incur finance charges. The big negative for charge cards is that you have to pay an annual fee to get and keep the card.

So what is the primary difference between a charge card and a credit card?

A charge card requires you to pay off your balance in full each month. But you don't have a preset limit. Instead, purchases are approved based on your spending and payment history, financial resources and credit record. As long as you pay your card in full each month, there's no interest rate or minimum payment. But if you don't pay the bill in full on time, you could incur late fees and other penalties.

A credit card allows you to revolve your balances, pay a minimum amount each month, and pay interest charges based on an agreed upon interest rate. With a credit card, you have a spending limit; if you go over that limit, your charge can be denied or you can face overlimit penalties.

Diners Club came out with the first charge card in 1950, but it wasn't plastic. It was made of cardboard. American Express came out with the first plastic charge card in 1959, and the AmEx card is the primary charge card available today.

JP Morgan Chase & Co. is getting into the charge card game with its new card called Ink Bold, which is intended for small-business owners and is in direct competition with the American Express Gold Card. American Express just rolled out a new charge card called Zync for young adults.

Is it better to use a charge card or a debit card?

The big advantage charge cards have over debit cards is that you don't run the risk of overdraft fees, as you can with a debit card. So if you've had problems avoiding those overdraft fees, paying just one annual fee to a charge card company may be cheaper for you in the long run. Another big advantage is that charge cards do allow you to improve your credit score, because you'll build a history of paying on time.

Charge cards make a good option for people who want the convenience of using plastic but know they'll pay their bill in full each month. They're better than a debit card because you're not risking overdraft fees and you're not risking your checking account balance being tied up as you correct an error or wait for a return credit. And they're better than a credit card because you must have the discipline to ensure you don't spend more than you can afford to pay each month.

And as long as you pay the bill, a charge card won't hurt your credit score because the balance you carry isn't calculated in your score's utilization, which is a large chunk of your credit score.

Lita Epstein has written more than 25 books including "The Complete Idiot's Guide to Improving Your Credit."
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