Charge Card vs. Credit Card: Know Their Differences
The terms charge card vs credit card is often used synonymously. That makes sense, considering that both a charge card and a credit card can be used to make a procurement. Some people may be confused because many cards appear the same.
Although they share a similar design, charge cards and credit cards actually perform quite different monetary functions. Despite the similarities, the differences become apparent when it’s time to pay the bill.
When it comes to making monthly settlements, charge cards function differently than credit cards. Consider a typical alarm clock. Using a credit card forces you to finally get out of bed—and pay for everything.
However, there is a “snooze button” on most credit cards. If you are unable to pay the entire sum at once, at least the minimum payment is due each month and the rest of the balance can be paid off over time.
Credit cards permit you to make little procurements and pay them off over time, a process known as “revolving” the debt. When your monthly charge card statement arrives, you must pay the entire debt.
The two sorts of cards may seem similar at first glance, yet there are important distinctions between them. This article will provide you with a more in-depth look at the difference between a charge card vs credit card so that you may choose which one best suits your needs.
What is a Charge Card?
In many aspects, a charge card is comparable to a credit card. But rather than having a predefined credit limit, transactions are permitted depending on things like spending trends, monetary history as well as other credit-related variables.
Users of charge cards are required to settle the card’s full balance before the end of each billing cycle. This implies that charge cards do not have required minimum settlements or interest rates that are structured in the same manner as those associated with credit cards.
However, if the full balance isn’t paid off each month, there is a possibility that additional fees or penalties will be assessed.
How Does a Charge Card Work?
A charge card, in contrast to a credit card, does not come with a spending limit that is predetermined. Because of this, it may be possible to make it more flexible, as you will have access to the purchasing power you require even if that sum varies greatly from one month to the next.
This does not, however, mean that you have an endless ability to spend money. If you are preparing to make a major procurement, you should first check with the card provider to verify if they would permit you to charge the sum that you have in mind.
When it comes down to it, having a charge card can make you a more responsible shopper because you’ll be aware that you’ll be expected to make settlements toward your debt in the not-too-distant future.
But, the flexibility provided by a credit card is far greater. You are only needed to make minimal monthly installments on the entire sum that you owe, despite the fact that it may have a strict limit on the sum that can be borrowed.
Settling your credit card balance in full every month is still in your best interest, even though the idea of making smaller settlements may be appealing. However, interest will accrue over time, contributing to your total burden, so it is still in your best interest to settle your card in full every month.
On the other hand, if you require additional time to settle your balance, a credit card can be the better option for you. When you make procurements using a credit card that has a promo initial 0% annual percentage rate (APR) offer, you won’t have to worry about paying interest for a certain sum of time.
In general, the duration of these deals ranges from six months to over two years. When it comes to charge cards, finding forbearance of this kind is quite impossible to come by.
Who Offers Charge Cards?
Those with poor credit can still apply for a credit card, but a charge card normally requires a good to exceptional credit rating. Because the servicer is taking on more risk by not imposing a monthly spending cap and instead counting on you to pay the entire sum each month. Consider a secured credit card if your credit file is limited or nonexistent.
The sole major servicer to offer cards that look like classic charge cards is American Express. Consumers can choose from the following current offerings:
- The American Express® Green Card*
- The American Express® Gold Card (Terms apply)
- The Platinum Card® from American Express (Terms apply)
These products are similar to charge cards in many respects, with the added benefit of a feature called “Pay Over Time” that, for some cardholders, permits eligible procurements to be treated like they would be on a credit card (up to the Pay Over Time Limit), meaning that they do not have to be paid off in full by the end of the billing cycle and are subject to interest charges*.
Although most store-branded credit cards permit you to carry a balance, American Express is the exception. Some stores, especially gas stations, may issue cards that can only be used at that particular store.
Charge Card vs. Credit Card: What’s the Difference?
You should know about the five main differences between a charge card vs credit card.
- Payments. You can carry a balance from month to month with a credit card, as long as you pay the minimum due at the conclusion of each billing cycle. Payment in full is due on a monthly basis when using a charge card.
- Required Credit Rating. Even if you have a low credit rating, you can still get a credit card. You need high to excellent credit to get a charge card.
- Fees. While there is no shortage of credit cards that don’t have an annual fee, most charge cards (like American Express) come with a hefty annual fee.
- Credit Utilization. About 30% of your FICO credit rating is based on how much of your accessible credit you actually use (also known as your credit utilization ratio). Any time you get close to your card’s limit, it can affect your rating negatively.
Since charge cards often don’t have spending limits, using one won’t affect how much of your accessible credit you’re actually using.
- Options. Whereas there are countless credit card options (each with its own set of advantages and disadvantages), charge cards are in short supply.
Do Charge Cards Affect Your Credit?
There are variations between charge cards and credit cards, yet both can be used to enhance credit.
- Inquiries. The servicer of a charge card or credit card will likely look at your credit file if you apply for one. That will lead to a serious investigation. While a hard inquiry will show up on your credit reports, it usually has little to no influence on your rating and can stay there for up to two years.
- Utilization . A credit card’s utilization ratio measures how much of your total accessible credit you are actually using at any given time. It’s a major consideration for credit bureaus when calculating your rating.
In the case of a credit card, your utilization rate is calculated by dividing your statement balance by your accessible credit. Your utilization rate is 10% if your statement sum is $100 and your credit limit is $1,000.
It has been hypothesized that a lower utilization rate is associated with higher credit ratings because it indicates to lenders that you are able to use credit responsibly without being overly dependent on it.
Calculating a utilization rate can be more challenging when using a charge card because there is no defined spending limit. While earlier scoring models may use charge card balances in their calculations of your utilization ratio, the VantageScore® and FICO® scoring models do not.
- Payments. Making timely settlements on credit and charge cards are a great way to enhance your credit rating.
For the most part, if you’re more than 30 days late on a payment, the credit bureaus will be notified. This can have a negative impact on your credit ratings, your ability to obtain credit, and the interest rates you pay on any existing credit accounts for up to seven years.
Charge card or Credit Card: Which Is Better?
Whether you should get a credit card or a charge card depends on your specific goals and monetary situation. Charge cards keep you from spending too much and building up debt, but there aren’t many of them and they charge steep annual fees.
Credit cards, on the other hand, offer more variety (including bad-credit credit cards), but make it simpler to amass debt due to the ease with which one can carry a load. A credit card, and in particular one with a 0% APR promotion, might be a great alternative for anyone who wishes some breathing room to settle a sizable procurement.
Ultimately, we can’t say with any certainty which card you should get. You can make a more informed decision about your monetary future and the credit cards at your disposal if you have a firm grasp of the options at your disposal.
Final Thoughts
When compared to other forms of revolving credit, credit cards provide more leeway, but this comes at the expense of security. Those who lack self-control when it comes to settling their credit card balances may quickly rack up a mountain of unwelcome debt.
On the other hand, most charge cards need full monthly settlements. The servicer may cancel your account and charge a steep penalty if you don’t settle your debt in full and on time.
As both charge cards vs credit cards have their perks, it’s difficult to choose between them.
Since the choice depends on your way of life and money, it is up to you to make it.
Both sorts of cards have the potential to enhance your credit file if you use them responsibly and settle the debt each month, but the main perks and downsides will vary depending on your spending habits and your monetary flexibility.
