Types of Charge Accounts

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Woman holding credit card beside phone and keyboard (Image: Prykhodov/iStock/Getty Images)

Credit card companies, banks, merchants and other businesses offer charge accounts so you can purchase goods and services now and pay for them later. The ability to charge can be especially important to meet an emergency need, start a business, or buy from those who do not accept cash. The types of charge accounts vary according to how and when you pay the balance, your borrowing limits, and interest. The arrangement you choose may affect your budget or credit rating.

Open Account

On an open charge account, such as American Express, you must pay the charges in full each month or you will face interest or penalties. With an open account, your balances do not roll over into subsequent billing periods because the entire balance is due each month. You might consider this type of account for purchases such as an airline ticket or dinner that you can pay off within a month. Since you do not carry a balance each month on an open account, your credit score likely will not be affected. According to Bankrate.com, credit scoring agencies either have stopped or expect to stop factoring open charge accounts into the ratio of your credit balances to your credit limits.

Divided Accounts

In a divided charge account, the full balance is not due at the end of the billing cycle, as is the case with an open charge account. Instead, you have a period time, such as 90 days, to pay the charges. The balance is divided into equal payments, so you would have three equal monthly payments if you have 90 days to pay. You normally do not have an extra charge for a divided account and no interest is charged during the period you have to pay the balance.

Installment Accounts

On an installment account, you charge the purchase price and pay off the debt in equal monthly installments. Most of your early payments go to interest. As your principal is reduced, so is the interest, and eventually your payments are applied primarily to principal. Installment accounts also carry the name “budget accounts” because the set monthly payment and account period allow you to plan for having enough income to pay the account and your other bills and expenses. Purchasers use installment accounts typically for one-time, high-ticket purchases such as a vehicle or an engagement ring.

Revolving Account

A revolving account affords you the flexible use of credit. You may charge purchases each month up to a limit determined by your account agreement. Most major credit cards are revolving accounts. Each charge lowers the available credit, while payments replenish the amount you can borrow. Your interest and, thus, your monthly payment depend on the unpaid balance. According to Bankrate.com, you will likely pay more interest on a revolving account than on an installment account. Continued purchases on a revolving account can increase the ratio of your credit balances to credit limits and lower your credit score.

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