Four Types of Charge Accounts

If you like flexibility in paying for things you buy, a charge account might help you manage your finances. A charge account is a credit arrangement with a business or bank that allows you to buy goods or services and pay for them later. There are various types of charge accounts, each of which has different terms under which you pay for purchases.

TL;DR (Too Long; Didn't Read)

Four types of charge accounts include revolving, regular, budget and installment accounts.

A Revolving Account

A revolving account allows you make purchases up to a maximum dollar limit. You can pay off the balance with minimum monthly payments over time and typically must pay interest charges on an outstanding balance. You can reuse the account as you pay down the balance.

Revolving accounts might be offered by retail stores or banks and might provide a credit card to use for purchases. For example, if you have a revolving credit card with a $2,000 limit, you can charge up to $2,000 and pay off the balance over time.

A Regular Account

A regular account allows you to spend up to a certain amount, but unlike a revolving account, requires you to pay your account balance in full within 30 days. You can reuse the account and you typically avoid interest charges and fees if you pay your balance on time. Various businesses offer regular accounts, such as retail stores and doctors. For example, your favorite clothing store might provide you with a regular account that has a $1,000 limit, which you can use and pay off within one month.

An Installment Account

A consumer typically uses an installment account to make a one-time purchase for higher-priced items, such as appliances or vehicles. This type of charge account might require a down payment and fixed monthly payments to pay the balance over a period of time, such as 24 months. Each payment applies a portion to interest charges and a portion to the principal balance. For example, you might buy a washer and dryer for $1,000 using an installment account that requires monthly payments for 12 months.

A Budget Account

A budget account with a utility company allows you to make fixed monthly payments based on your average monthly usage in the past. This arrangement helps you avoid bill increases when you use more utilities in a particular month, but unpaid usage can accumulate. If you consistently use more than you were budgeted for, you might have to pay for the extra usage at year’s end. Also, a retailer might offer a type of budget account that allows you to pay for a purchase in two or three equal monthly payments.

Charge Account Considerations

Be sure to use a charge account only for an amount that you can afford to repay. Failure to make timely payments on a charge account can potentially damage your credit rating. You might incur higher interest charges and late fees, and this might limit your ability to obtain credit in the future. Always fully understand a charge account’s terms before opening one since terms can vary widely among account issuers.

the nest