Charge card vs. credit card: What's the better choice?

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Question for the expert

Dear Opening Credits,
I am thinking of requesting a second credit card. I have had a Capital One card since 2004 with a $500 limit. But I am going back to school in August, and I may need some loans. My credit score is excellent, and I have no negative history. Would a second card affect me in any way, given the explanation given above? I am thinking of an American Express with no annual fee. They sent me an offer for a card with an annual fee, but I was thinking I'd ask them for the one they offer that does not have a fee. Please let me know what you think. Thanks. -- Anne

Answer for the expert

Dear Anne,
Well done, Anne! With six years of terrific credit activity behind you, it looks like you are more than ready to handle an account with greater borrowing power. And adding that second card will likely only help your credit. The question is, should it be a charge card or another credit card? So you can decide which makes the most sense, here is a brief overview of each type.

Charge card. A charge card doesn't allow for revolving balances, but it does let you borrow money for about 30 days. If you don't repay the balance in full by the due date, you'll get penalized and the account may be suspended. Most issuers impose at least a small annual fee, and some elite level products are very costly. For this reason, I believe the card American Express offered to you was actually a credit card, as the company offers both products. Charge cards can be worth their price because of their premium rewards programs and membership benefits. I like them because they provide the freedom to borrow quite a lot of money, but the short repayment term forces you to keep debt down.

Credit card. As you must know by now, a credit card does allow you to make minimum payments and roll the balance over to the next month. Of course, there are times when financing a product or service is smart, but by no means is it always a wise idea. When you carry over balances, interest charges are added, which increases the cost of your purchases. Cardholders must be extremely conscious of how much they charge and be committed to repaying the debt quickly. Because you've been such a responsible borrower, you are probably entitled to a credit card with no annual fee, but like the charge card, you should get one that is also equipped with great terms and benefits.

As far as which to pursue, it's kind of a toss-up. With a higher limit credit card, you'll enjoy the short-term financing option. This will be nice if you need buy a new laptop or some other expensive but necessary item. If you break the price into two or three payments, the finance charges will be minimal. Still, you've got to be very disciplined to keep the debt down.

On the other hand, if you think a charge card will keep you debt-free and you prefer the rewards program it comes with, then it, too, is a fine choice. Adding a charge card to your credit portfolio has another advantage to consider: It will help your already good score. Ten percent of a FICO scoring model is comprised of "types of credit in use," so adding a different variety and using it well can bump it up even more. In fact, this answers your question about how adding a new credit instrument will affect you. Most likely it will have a positive impact.

Can you get both? Sure, just don't go overboard. Most people only need a few credit accounts. Get too many and managing them all becomes a pain in the neck. Research all the credit offers that are available right now, and apply for just one or two. Excess applications will reduce your score, which is exactly what you don't want. Whatever you settle on, keep the card you currently have active because you've established such a good, long history with it.

And finally, Anne, be careful about future spending and charging. You say you may need some new loans because you're starting school, but overdoing it is incredibly easy. Borrow prudently. As a student, your cash flow may be tighter than you are used to, and the last thing you'll want to do is pay extra for finance charges. More, dealing with debt is terribly stressful and not healthy when you're trying to concentrate on academics. 

See related: 8 things you must know about credit card debt, Compare charge cards, Compare rewards credit cards 

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Updated: 11-12-2018