Money Rehab with Nicole Lapin - Credit versus Charge Cards

Episode Date: July 26, 2021

You may think “charge card” is just a nickname for “credit card;” but, that’s fake news. Nicole explains how they’re different and which one is right for you. Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. Today we're switching gears from credit scores to credit cards.

Will writes in with this question. Hey Nicole, I'm 31 so I'm sort of embarrassed that I don't know this. But what's the difference between a charge card and a credit card? I have a credit card and I've been pretty good about paying it off in full. I'm now thinking of getting a second card. If I'm planning on making a big purchase, what type of card should I sign up for? First of all, Will, don't be embarrassed. Here on Money Rehab, our specialty is answering the money questions you've been pretending to understand. Plus, you get brownie points for even knowing there's a difference between charge cards and credit cards. Because

a lot of people actually think they're the same thing, maybe just with a regional difference or a generational difference, like pocketbook versus purse or handbag, soda versus pop or coke, lollipop or sucker, freeway or highway, remote or clicker, charge card or credit card. But you know what? Those are actually different. When it comes to the plastic you carry in your wallet, there are so many options. It's really like a dating. So let's talk about finding your perfect card, just like finding your perfect partner. A credit card is a freewheeling type. They are fun, but they can also bring trouble. And when you bring them home to see your parents, there's a 50-50% chance they'll approve. A credit card bae might be a good match for you if you find

comfort in flexibility and you think you can rein in a wild one. A charge card is the buttoned up mysterious type. They come from money and they think you're a loser if you can't cover the tab. A charge card might be a good fit for you if you feel like you have your shit together enough to keep up with a straight-laced boo thing. Got it? Capisce? So, Will, does that point you in the right direction? Just in case you're not down with the relationship analogies Mama Money Rehab is throwing down, let's take it back to finance land. So, credit cards are probably what you think of when you think of swiping plastic, right? There's a standardized spending limit and you want to spend less than 30 to 35 percent of that limit at all times. With credit cards, it is possible to carry a balance month after month. Of course, we know

that carrying a credit card balance means attacking on fees that you're going to have to pay on top of what you owe. That fee brought to us by our frenemy compound interest. We hate that shit when it works against us, but we love it when it works in our favor. But there's no expectation that you'll pay your credit card balance in full every month. The rules of charge card engagement are less understood, really because charge cards are straight up less popular. In fact, you may have had a hard time finding a charge card offered by a big institution, with the exception of American Express that does offer a charge card. With charge cards, there often isn't a standardized

credit limit. Instead, when you apply for a charge card, your limit will likely be determined by your individual financial DNA, aka your credit score, your payment history, and so on. On average, charge card limits do tend to be higher than credit card limits, but that's mostly because in order to qualify for a charge card, you need to have stellar credit. Like, if you're looking at that classic credit score meter that looks like the fuel level gauge on a car, you know, the one there on the dash. It goes from red, a low score, to green, a high score. Yeah, that one. So in order to qualify for a charge card, your credit score needs to be bright freaking green. I'm talking 700 or higher. In contrast, your credit score can kind of be in that yellow zone and you likely won't have an issue getting a credit card.

Let's make our friend Brian Kelly, the points guy, proud and talk about the goodies. Charge cards and credit cards have pretty comparable rewards systems. You can still get your rewards, points, and your travel miles regardless of whether you're throwing down a charge card or a credit card. But on average, charge cards typically do require higher annual fees to play. Forbes points out that there are plenty of no annual fee credit cards, but charge cards that are currently available carry a yearly cost of membership of anywhere between $150 to $550 or more. So, Will, because of what I mentioned about the credit limit being higher on charge cards, some financial experts may tell you that a charge card is a better option for you than a credit card if you're

planning on making a big purchase. I don't necessarily share that opinion, and I'll tell you why. Unlike credit cards, with charge cards, you have to pay the entire balance off every month. This rule leads to a common misunderstanding that I want to clear up for y'all, ASAP. Some people think that a charge card is the best plastic option because there isn't interest tacked onto your balance. But that's not the right way to think about it. Charge cards only have no interest because there's no month-to-month balance. Or in other words, there's nothing to pay interest on, hopefully. I say hopefully because if you do not pay your balance off in full or you're late on your payment, there is a

big old penalty, which is either a flat amount or a percentage of your balance, which sounds awfully similar to, dare I say, an interest rate. Not to mention, if your charge card payment is over 30 days late, it will be reported to the credit bureau where it can weigh down your credit score for up to seven years. So if at that point you're over the charge card business and apply for a credit card, well, guess what? The credit card company is going to give you a steep interest rate because your credit score isn't looking so hot after that charge card conundrum. And yes, credit cards can also hurt your credit score if you miss a payment, and you can even get charged a late fee on a credit card

payment. But for credit cards, the late fee is capped at $29 for the first whoopsie and a maximum of $40 for late after that. So Will, a charge card may be a fine contender for you because it seems like you're in the habit of paying your bills on time. Props, by the way. But honestly, if you pay your credit card off in full every month, it's pretty similar to a charge card, just without the steep annual membership fee. If you're planning on a big purchase in the near future, I'd recommend opening a second credit card that has a good reward system where you'll earn points on the dollars you spend swiping that credit card. So for today's tip, you can take straight to the bank. Credit cards, charge cards, some people use them interchangeably. They're not exactly the same thing,

but they are pretty similar. So in most cases, I'd recommend dumping the biggie annual membership fees and the risky late fees and swipe right on swiping credit cards. Money Rehab is a production of iHeartMedia. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Catherine Law. Money Rehab is edited and engineered by Brandon Dickert with help from Josh Fisher. Executive producers are Mangesh Hatikader and Will Pearson. Huge thanks to the OG Money Rehab supervising producer, Michelle Lanz, for her pre-production and development work.

And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.