Did you know that there is a difference between a charge card and a credit card? It is quite difficult to decide which one fits best into your financial status, so we’ve made it easy. It is important to know the pros and cons of each. The differences begin with the spending limits, payment terms and other crucial details that can help or hurt your credit score.
What is a charge card?
Charge cards have no pre-set spending limit, this allows users to make purchases and charge their cards with any amount but it has to be paid in full by the end of the billing statement. Failure to pay the charge card in full by the end of the month can have its serious consequences. The fees are much higher than credit cards and you can even get your charge card revoked.
Because these cards don't have a pre-set limit it gives the user the freedom of using their charge card as they please. Due to this reason, most all charge cards have an annual fee ranging from $95-$550.
American Express is the only company that currently offers charge cards. There are three options available the Green Card, Premier Rewards Gold Card, and The Platinum Card® from American Express.
What is a credit card?
Credit cards are based on a credit limit, it lets users make purchases “on credit” - meaning you charge and pay off the credit card as you can afford to. It is basically like having a small loan for your everyday expenses and paying off as you go.
Credit card holders are not obligated to pay off the entire amount at the due date. But, they are required to pay at least the minimum payment amount that the card issuer shows on the statement. If the balance is not paid, the cardholder will be hit with additional fees called Annual Percentage Rates (APR) on the remaining balance due.
What are the differences between charge cards and credit cards?
There are four unique differences including their payment terms, spending limits, annual fees and other optional perks that might be available. When you are trying to decide which card to get, its all on you to be true and know whether your charges will be paid in full by the end of the month, how regular your monthly spending is, and if you're okay with an annual fee or not.
Charge cards over credit cards
Charge cards are ideal for those who have the ability to pay off their full balance by the end of every month. They are usually a bit more pricey to obtain because of the benefits to the cardholders including access to the American Express Membership Reward Program. With a charge card, you are allowed to make a big purchase without worrying about hitting the capped amount that the company issues or going over the recommended 30% spending limit.
Having a charge card is a good start to implement financial discipline within yourself (if you're not there yet). The use of a credit card gives you some sort of peace of mind since you can pay it off over time but if it's not taken care of it can lead to poor financial management practices.
A charge card trains users to face their full amount spent at the end of the month which will ultimately lead to good budget management. Failure to pay comes with consequences as bad as getting your card taken away. The damage it can do to your credit score is more than a credit card can do, there is also higher penalties for missing a payment.
Credit cards over charge cards
Credit card users have more flexibility with how much they decide to pay at the end of the month. Credit card holders also have a clear picture in mind of how much they can spend, unlike charge cards that have no spending limit. The credit limit is predetermined once approved. This limit cannot be exceeded or your purchase will be denied because the bank didn't approve to lend you more than the stated amount. There is an option to increase your credit limit by asking your bank. There are other instances where your bank will automatically grant you an increase for having an impeccable payment history and responsible spending.
Paying off the minimum amount given by the issuing bank isn't always the best idea because the balance that is left in the statement period will incur interest expenses. Usually, the interest rates on credit cards are much less than those on charge cards, which can save users money overall.
Generally, they have bonuses, cash back rewards, no annual fees, and other attractive perks. Cashback rewards can range from 1% on everyday purchases, 2% on gas and 3% on groceries to higher percentages and more higher point redemption.
There are many more credit card options than there are charge cards.
Charge card pros and cons
What does it mean when the bank issues a “no pre-set spending limit”?
It is an attractive ad to not have a spending limit but it is also important to understand the meaning of not having a spending cap because it can spiral out of hand quickly. The spending limit is not set in stone but it fluctuates from month to month depending on the user's payment history, income, credit score, etc.
The issuer is not lending the user money, they are just charging the card until the end of the month to pay it off in full.
Does having no pre-set limit effect one's FICO score?
Usually, part of your credit score is determined by the percentage of your credit card limit that is being used at once. Since charge cards don't have a limit, many think that it can negatively affect your score which is not entirely true. Credit bureaus such as FICO look at the spending of charge card holders rather than limit usage.
What if I can't pay off the full amount by the end of the month?
Having no spending limit along with having no option to make partial payments can be damaging if it's not taken care of. The issuer will always keep an eye out for excessive spending and monitor your purchases but since they don't know much your spending budget is they may not be the best ones to determine when to cut your spending off. This can lead to over-spending and not being able to pay off the full debt at the end of the month.
There will be high penalties and fees if the balance is not paid in full along with a strong hit to your credit score.
What are the penalties for late payments on credit cards and charge cards?
If a situation arises where a cardholder cannot pay their credit balance in time, two different scenarios play out depending on whether one has a credit card vs a charge card.
When it comes to having a credit card - you receive your bill, you have an option between whether you want to pay the full amount, just a portion or solely the minimum. If the full amount is not paid then you will notice interest amounts start to show up, for each month you drag a balance, along with penalties. A credit card is recommended for those who may need more time to pay off their bill, as long as the minimum payment is made then it won't drastically affect your credit score.
For charge card holders, as you know - the full amount is due with no option to pay over time. Even if you pay 99% of your statement amount you will still incur a late fee which is 3% but that can be deceiving since it seems low compared to credit card APRs of 13% or more. With a charge card, 3% monthly interest equals to an APR around 36% which is more than double of credit cards.
Picking a credit or charge card can be quite difficult, do your research and decide with one is better for you below!