This is why I use charge cards and not credit cards

Have you noticed the competition in the credit card industry?

It seems like new premium cards with incredible cash back and points offers are introduced to the market every year. I’ve been tempted to play with all of these points and become someone like the Points Guy, but my wife won’t allow me to get a new credit card…it’s for my own good so I’m fine with it. Plus, for a credit conscious guy like myself I wouldn’t recommend frequently applying for new credit cards because the credit inquiries will kill your FICO score.

What’s in my wallet?

As I mentioned, I’m very credit conscious so I wanted a product that would have the least negative impact to my credit score and offer a great rewards program because we love to travel 2-3 times a years. This criteria led me to my personal choices of the American Express Gold and Platinum cards.

Let me take the chance to mention this now, my intentions are not to sell you on these products or to talk about the rewards program. I am employed by American Express but I do not have any referral links and will not be paid for publishing this post, as this is more focused on the differences between a charge card and credit card.

Why is a charge card so important to me?

A charge card is designed to be paid off in full every single month or you’ll pay a fee if the balance is not 100% paid off. It doesn’t have an APR because you can’t roll over the balance and pay interest. In addition, charge cards have a no pre-set spending limit which offers a flexible spending power and there is no fixed line of credit.

On the other hand, credit cards give you a fixed line of credit, give you the ability to make a minimum payment and have an APR which schedules the interest costs you’ll pay on the balance you roll over.

2 main reasons why I won’t consider any other type of product:

  1. Charge cards keep me honest. Since I have to pay it in full every month, I watch my spending on the charge card very carefully and it falls in line with our budget. It leaves no room for error because our personal savings rate is 25% of our income so every dollar spent on these cards is tracked in our budget / transaction sheets.
  2. It has drastically improved my credit score. This is one of the main reasons why I love charge cards. Since there is no fixed credit line on the account, the balance on your statement is reported to your credit report but there is no “ceiling” to measure the utilization rate. Therefore, the money spent on charge cards do not impact your credit score!! In a previous post, I explain that the amount owed on your credit lines (utilization rate) impacts 30% of your FICO score. Since I’ve been trying to get myself into the 800 club this was the biggest area of opportunity for me to improve my credit. I’ve attached a screen shot from my Credit Karma so you can see what I mean…

The N/A next to the utilization rate has worked magic for my personal credit score over the past 2 years. My credit back then was in the mid-600s and now I’m looking at entering the 800 club pretty soon because of this one change.

Of course, I can’t be objective without bringing up some things that you’ll need to keep in mind and these can be negatives for some:

  1. Charge cards have higher annual fees. Beware that charge cards can have higher fees than typical credit cards. They are justified by the premium programs they offer but I won’t get into those programs in this post.
  2. Pay in full, every month. There are no ifs, ands, or buts. Charge cards don’t play…they can be your best friend or your worst nightmare. Before you commit to it, make sure you are committed to your budget and paying off the balance in full every single time.
  3. Don’t be fooled by the No Pre-set Spending Limit. Just because there is no fixed credit line, this doesn’t mean unlimited spending. Consult with the credit company and inquire about the purchasing power on your charge cards. Even if they tell you that you’ve got $10K, $20K, $30K of purchasing power, are you able to pay it all off in full in the next 45-30 days?

For my final thoughts, charge cards are not for everyone and I know that. But if your a credit conscious consumer and you’re paying your credit statements in full, maybe you should give a charge card more thought. As I think about it, you can technically pay off your credit card in full once you’ve received the statement but by then your credit card company would have reported your statement balance to the credit bureaus and it would change your utilization rate. The only way to avoid that is if you paid your credit card balance in full before the statement is produced and it reflects a $0 balance.

 

 

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