Charge or Credit?

Not all credit cards are created equal. In fact, not all credit cards are credit cards. Some are what is known as "charge cards."

Charge cards are different from a credit card and different than a debit card.

A debit card is essentially a direct withdrawl from your bank account. Swipe your debit card and automatically this money is deducted. A debit card is used at ATM's etc. There is a bit of a risk to using a debit card for all of your purchases.

Think about it. If someone obtains this number, they essentially have direct access to your bank account. Although banks have safeguards and would usually alert you in the event of someone withdrawing large amounts of money.

If you bank with Wells Fargo, for example, your debit card will be with Wells Fargo.

Your charge and credit cards will be linked to your bank account but when you swipe either of these, the money is not automatically withdrawn.

So something I have experienced first hand (I like to share my poor choices with you all so you don't make the same!) is I am severely lacking in proving my creditworthiness for a few reasons.

Post college I was fortunate to have no student loans. No home (AKA no mortgage). No car note, etc. Basically, this just means I have no debts or money borrowed in which I have to repay. Which is DEFINITELY good in many ways.

One way it is bad, is that if I were trying to purchase a home, rent an apartment, lease a car, I have nothing to show that I am a good risk and that a bank should lend money to me.

I knew I needed to start building credit, so fresh out of college I applied for a credit card.

SYDNEY CORRECTION. I applied for a charge card.

Thinking I had done sufficient research, I sprung for the American Express Gold card. This card came with massive reward travel points therefore it was a no-brainer.

Now, American Express cards are NOT credit cards. They are charge cards. What's the difference?

A charge card MUST be paid in full every month. This was not an issue for me as I was only ever spending what I had in my bank account. You cannot roll your balance month to month as you can with a credit card.

This card forces you to watch your spending. If you can't pay, then you face a penalty. The benefit is that you never have to worry about paying interest on your balance.

The card above, the Chase Sapphire Reserve is a CREDIT card. Credit cards only require you pay some set minimum amount each month. As long as you make the minimum payment, you are able to rack up charges and carry them month to month.

This is beneficial if you are in a situation where you cannot pay your bills each month. You are buying on CREDIT; essentially being given a loan.

But this is not free. You are charged an Annual Percentage Rate (APR) on your outstanding balance.

Generally, if your credit score is lower, you will pay a higher APR as a penalty.

Quick recap on credit score. The FICO credit score scale goes from very poor at 300 to perfect at 850.

Your credit score is something you consistently need to work on because having a better credit score saves you money. A higher credit score shows you are a responsible borrower, therefore you will be charged a lower APR, insurance will be cheaper, etc.

So how did I find out my credit score is v mediocre?

So, this is also a note for people who live in large cities like myself who might not have a vehicle. I am no longer covered under my parents insurance. I had rental insurance on my condo and that was it.

Even though I don't have a car, I will occasionally drive my friends or families cars. Guess what? I wasn't covered. Long story short, if you live in a city and don't have a car you obviously don't need auto insurance because there is no car to insure. Be sure to look into an umbrella policy for liability suits and/or a non-owned policy (besides the point, just food for thought.)

Anyways, trying to purchase this insurance, I realized my credit score was extremely low. How? I pay my bill on the dot every month.

However, I have never been BORROWING any money. I have been using a charge card, my AMEX. Therefore even though it is borrowing in a sense, it is not figuring into my credit utilization rate.

I know, Mafee. It's confusing. Credit (or debt) Utilization Rate is what portion of your credit limit you are using to borrow (charge cards don't have credit limits.) If you have a $10,000 credit limit on your CREDIT card and have a balance of $1,000, your CUR is 10%. Lower is better. Spending less is better. Showing you are a controlled spender is key.

Having a charge card (as long as you pay it off,) doesn't hurt your credit score. It just doesn't help as much as a credit card. Credit limits are the main things reported to credit bureaus, hence the main way your credit score is calculated.

As it makes sense, getting a CHARGE card is more difficult than a CREDIT card. Being required to pay off your debts each month makes it necessary to have credit score of at least 700 in order to qualify.

Sources:
Credit Card Insider
Google Images
Investopedia