Charge cards versus general-purpose credit cards
Different types of credit cards work in different ways. All credit cards are open-end credit
. This means that the creditor gives you a credit line that you can charge against, as needed.
- With a charge card like most American Express cards, there is no set spending limit; you can charge as much as you want. But you must pay off the balance in-full at the end of each billing cycle. This means that you don’t pay interest charges. However, it also means you can face steep penalties if you don’t pay in-full. These cards also usually have an annual fee, which is an added cost that you pay each year to keep the account open.
- General-purpose credit cards like Visa and MasterCard give you a set spending limit called a credit limit. You can only charge so much in a single billing cycle. But the advantage is you aren’t required to pay off the balance in-full each month. Instead, you must meet a minimum payment requirement, that’s usually between 2-5% of the balance owed. These cards are less likely to have annual fees, but you do pay interest charges each month that you carry a balance over.
Since you’re new to credit cards, it’s also worth noting that there are secured credit cards
and unsecured credit cards
. Most credit cards are unsecured, meaning you don’t need collateral to open and use the credit card. Secured credit cards require collateral, in most cases a small cash deposit that you use to open the account. Most secured credit cards are general-purpose cards. And these are typically the first cards you get if you have bad credit or no credit.
Credit card reference guide
Here’s a reference table that can help you compare the two types of cards:
||General Purpose Credit Card
||No pre-set spending limit
||Spending limit based on your credit score (unsecured) or size of cash deposit (secured)
||Many cards don’t
||Pay off all charges in-full
||Minimum payment based on your balance
Which card is right for you?
As a new credit user, I’d recommend starting with a general-purpose credit card first. These credit cards are the most widely accepted, so you can use the card in more places. You may also have an easier time getting approved, since you can apply for a secured credit card. With a cash deposit, you can open the account even with a weak credit score. That’s probably important, since you’re new to using credit.
A secured general-purpose credit card also gives you breathing room as you get used to charging and managing debt. If you overcharge on a general-purpose card, the payment shock to your budget will be less than with a charge card. If you run up a huge bill on a charge card and can’t pay it back, you can get in trouble quickly.
That being said, even with a general-purpose card, try not to run up a balance. If possible, pay the balance off in-full every month. This will allow you to avoid interest charge and you won’t get in trouble with debt. It will also help you get used to paying the balance in-full if you decide to get a charge card down the road.
So, I’d recommend starting with a general-purpose credit card first. Then, once you get comfortable using credit and improve your credit score, you can decide if you want a charge card as well.
I hope that advice helps!
President of Consolidated Credit
Read Gary’s Bio.