It is important to compare credit card interest rates, but there are things besides interest rates to consider. As you look for sources of capital to run your business, credit products can help you not only pay your bills, but also build a credit history for your business. In addition to bank loans and credit lines, you can open charge and credit cards. While many people use the terms “charge card” and “credit card” to mean the same thing, these two financial products are different. Understanding the features and benefits of each will help you avoid choosing the wrong type of card and ensure you pick the one that is best for your needs.
You are probably familiar with credit cards, which come with pre-set spending limits. You must pay at least part of your balance each billing cycle, with the remaining, unpaid balance earning interest. While you can pay the full balance each month to avoid interest charges, you’re only required to pay your minimum balance each billing cycle. Late or missed payments can cost you extra fees, reduce your credit line, increase your interest rates and damage your credit history and score.
Charge cards work like credit cards, allowing you to make purchases and then pay for the purchase later. Unlike credit cards, charge card require you to pay your full balance each billing cycle. This means you won’t pay interest charges. The charge card company makes its money from your annual fee (usually higher than with a credit card), late fees and from the fees paid by merchants to accept the card. Late fees and penalties are often higher than those charged by credit cards. Like credit cards, some charge cards offer rewards points, based on your spending.
Credit cards offer a specific and limited amount of credit, usually based on your credit history, score, amount of current debt and annual income. Charge cards have no set limit, but card issuers carefully watch your spending and might cancel your card if they don’t believe you can make your payments. But it is important to note, if you have a charge card that you pay off each month then the interest rate doesn’t matter, does it?
Each time you use a credit card, the balance is added to the total amount of credit you’re currently using, which appears on your credit report. Your credit utilization affects your credit score. For example, if you have two cards that provide you with $10,000 worth of credit and you have used $2,000 worth of credit, your debt-to-available-credit is 20 percent. If you make another $2,000 worth of charges, you have used 40 percent of your available credit. The higher your credit utilization percentage, the lower your credit score. If you review your credit report, you might see “Balances too high in relation to available credit,” as a negative factor affecting your score. With charge cards, the amount you charge doesn’t go onto your credit report and doesn’t affect your score.
With either type of card, if you make your payments on time, you can build and improve your credit. If you are late with payments, miss payments or default on a card, you damage your credit. Of course, if you plan to carry a balance then you need to compare credit card interest rates because rates will really matter.
Charge cards can be a helpful tool for building credit and obtaining credit lines with higher limits. These cards come with higher annual fees, and if you have trouble making your payments, they charge much stiffer penalties than traditional credit cards. But with any card credit rewards programs can earn you extra money, so be sure to compare rewards programs in addition to interest rate.
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