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If You Do Choose to Use Cards, Choose Wisely

I believe one of my greatest attributes is that I’m a realist. And, as a realist I know you are going to use plastic to make purchases, and that’s perfectly fine as long as you don’t let the plastic ruin your life. But before you decide on the type of plastic to use consider the following pros and cons of each.

Retail Store Cards – These are cards issued in the name of a retail store or retail chain. The setting of the terms of these cards doesn’t follow the same process as credit cards. Why do I say that? Retail store cards always have very high interest rates and very low credit limits.

In fact, if you closed your eyes and I explained that your new card had a 24.9% interest rate and a $750 credit limit you’d think I was describing a sub-prime credit card reserved for someone with terrible credit. You’d be wrong because I’d be describing a retail store card.

Additionally, retail cards can be used in either the store or the chain. Other than that they have no usability, which means you’ll have to have other cards if you want to shop at other places. Ask yourself a simple question…where can I use my Macy’s card? The answer to the question…Macy’s. This acts as an incentive to open several of these “subprime” credit cards.

The low limits also mean even modest purchases can lead to the card being highly leverage or “utilized.” This is bad news for your credit scores. However, making the same purchase on a general use credit card like a Visa or Discover could be almost meaningless to your credit scores.

The only pros I can think of to using these cards is they don’t have annual fees and you will get discount offers periodically, judging by the amount of coupons I get in the mail each week.

General Use Cards – These are Visa, MasterCard, Discover and some American Express cards. They usually have pretty competitive rates if you’ve got good credit and their credit limits can be well in excess of $30,000. They can also be used almost anywhere that accepts plastic. And, with the recent passage of the CARD Act consumers are enjoying slightly better treatment from credit card issuers than they enjoyed in the past. That’s the good news.

The bad news is that it’s easy to get into a lot of credit card debt using these cards. And, the higher the balance the more interest you’re paying. Tack on the fairly common annual fees charged by these guys and the tradeoff, which is still better than a retail store card, loses some of its luster.

Charge Cards – Do you know what a charge card is? I’ll give you a hint…it looks like a credit card, it smells like a credit card but it isn’t a credit card. Charge cards are commonly referred to as “pay in full” products because you’re required to pay the balance in full each month. The American Express Green card is a good example of a well-known charge card.

The credit limits on these cards are not published but trust me, you’ve got one. It’s called a shadow limit. Because of the lack of a credit limit these cards can sometimes lower your credit scores because of how they’re considered when measuring the infamous “utilization” percentage, which is more fully explained here. But that doesn’t mean these are bad cards.

Because charge cards must be paid in full each month you’ll be less likely to charge a huge balance. And, that means you’ll be less likely to get into debt. It also means you won’t pay interest with these cards. That’s good news, but it’s also bad news.

Charge card issuers have to make money and since they’re not making it off interest they’re more likely to charge you an annual fee. They are also usually reserved for consumers who have strong credit, which means they’re not an option for everyone.

So the next time you’re shopping around for a card keep in mind that each of them has their good points and their bad points. And if none of them sounds like your cup of tea, well, maybe you should stick to buying things with paper instead of plastic.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.

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