The difference between charge card and credit card is harder than ever to identify.
The two cards look similar and are used to make purchases in the same way. Because of that, it’s simple to understand why people confuse charge card vs. credit card.
However, there are a few conspicuous difference between charge card and credit card. This guide will walk you through individual explanations, differences, and typical consumer preferences between the two.
The dimensions of a credit card allows consumers to purchase goods and services using ‘borrowed’ money on credit. You can put off making payments until the end of the billing cycle. You could think of a credit card as a small, quick loan to make your typical purchases.
At the end of a billing cycle, credit card companies give the option to pay minimum payable balance that prevents late fee and penalties from incurring. You can continue using a credit card without ever paying the whole balance in full. This is called revolving balance.
Charge cards are similar to credit cards in many ways except the bill amount in charge card needs to be paid in full every month. Cardholders can be subject to heavy fee if they fail to do so. They may also potentially forfeit their charge card.
Furthermore, charge cards have no preset spending limits. Traditional charge cards are a thing of the past. Nowadays, American Express is the only major issuer of these cards.
There are 6 major difference between a charge card and a credit card as explained below:
Preset Spending Limit
Credit cards come with credit limits which refers to the total amount you can spend every month or quarter. You cannot go over the credit limit because the card will automatically decline. Some credit card companies allow cardholders to spend beyond the credit limit by paying a heavy over-limit fee which gets added to the monthly billing.
Charge cards on the other hand do not come with a preset spending limit. However, the card issuing company might fix a spending limit to control losses in the event of non-payment.
Charge cards need to be paid off in full every month. This is a good thing as you do not become a victim to the credit card debt merry-go-round. You can control your spending and keep a check on your finances.
Credit cards allow you to slack off on making full payments. All you need to do is pay the minimum payment to continue using your card. However, the amount left incurs a heavy interest charge which is how credit card companies make money in the first place. Credit nerds who know a lot about how credit work are not surprised by this, other consumers might be.
Revolving balance can cost major dollar amounts in terms of Annual Percentage Rate.
Credit card companies will slap a late fee and additional penalties if you miss on the monthly payment and allow you to continue using your card. However, in the case of charge cards your account may be suspended following a missed payment.
This means your privileges will be put on hold. The issuing company may also close your account. End experience varies among different companies and depends upon your credit standing and relationship with the issuing company.
Annual fee are more common with charge cards than in credit cards. A majority of credit cards except the reward credit cards do not charge annual fee. However, charge cards come with annual fee higher than $95. Companies tend to waive off this fee in the first year to attract cardholders.
High annual fees are more to do with no interest rate. Credit cards make money for the company by way of interest charge on revolving balance. However, charge cards have no other way of making money for the services provided. In addition, charge cards come with top notch perks especially in the traveling sector.
There are fewer charge card issuers in the United States than credit cards. Your options are limited to American Express as the major player to apply for a charge card. In contrast, credit cards are issued by most financial institutions under MasterCard and Visa logo.
Charge card vs credit card are similar in terms of credit pulls and reporting. However, charge cards may not help you build your credit score. Charge cards do not come with a preset limit which makes it difficult for scoring models to calculate credit utilization.
Utilization refers to the amount of available credit you have at any given point of time. Hence, with charge cards, the utilization element will not be hurt irrespective of the amount of spending you carry out in a month.
When is a Charge Card Better?
Charge cards are great for people who need financial discipline in their life and have no problems in paying off their monthly balances in full. High annual fee can be a drawback. However, the rewards, perks and benefits that come with charge cards make up for it.
These cards also prevent a user from falling into the debt trap as they have to pay off the charge card balance in full every month to avoid heavy late fee, penalty and interest charges.
When is a Credit Card Better?
In comparison, credit cards offer more flexibility by extending a credit line. This is great for people who do not have a steady stream of income. You can maintain your lifestyle by paying the minimum payable amount every month and take care of the full balance once your income steadies.
However, interest accrued on credit card balance can sometimes surpass your purchase amount if you are not diligent. There are also more options for people when it comes to credit cards. You can take your pick to maximize on rewards, loyalty points and cash back as per your spending habits.
The difference between charge card and credit card are not that great if you pay off your card balances in full each month. You can have a greater spending power with charge cards. However, credit cards offer more flexibility than charge cards and make it easier for you to maintain them. Also, you do not have to pay the heavy annual fee when it comes to credit cards.
Charge cards are ideal if you like paying off your balances in full, need a high spending limit, or want to enjoy built-in travel rewards.