December 18th, 2009
Credit Card or Charge Card: What is the Difference?
A credit card and charge card may function very similarly, but their crucial differences will determine which one is the best fit for your wallet and your particular credit usage.
At its simplest, a charge card is a credit card that cardholders are required to pay off in full every month while still providing the benefits of regular credit cards. Charge cards offer cardholders a line of credit, great rewards programs, as well as cardholder service and protection. Charge cards are reported to the credit bureaus and will damage your credit score if you don’t pay on-time or in full.
The key difference between the two is that a charge card must be paid off in full every month, whereas a credit card can carry revolving debt. This difference between the long-term credit line of a credit card and the short-term credit line of a charge card has several implications:
- With a credit card, you have the flexibility to determine your monthly payments as long as it is at least the minimum amount. Being able to pay the balance over time is a more affordable, practical option if your financial situation can change month to month. On the other hand, a charge card’s required full monthly payment saves you from growing debt, but can it be a financial burden if you can’t make the full payment and are charged expensive penalties.
- Credit cards profit off of cardholder through interest charges in recompense for the privilege of carrying a balance. While charge cards do not have interest rates, they charge an annual fee to make money. Fees range from American Express Zync’s $25 fee all the way up to American Express Platinum’s $450 fee.
- A charge card has no preset spending limit, so in theory, you can spend whatever you want on it as long as you still pay your balance in full. However, that doesn’t mean you can go out and purchase a yacht. The issuer will assess your credit history, spending history and annual income and measures your transactions against your credit profile; they can limit your spending privileges if it seems like you are at risk of overspending and defaulting on payment. If you neglect to pay off the whole balance each month, you’ll be subject to expensive penalties and your issuer may cut your privileges completely. A credit card’s credit limit is determined by the issuer, depending on the cardholder’s credit standing.
There are some hang-ups to getting a charge card, like being financially secure enough to consistently pay off your balance in full every month and paying an annual fee. But if you can deal with these card terms, you get the freedom of unlimited spending limit, the no-hassle deal of a short-term loan with no interest, and some great rewards and customer service like American Express’ Membership Rewards First program. If you are assessing which card works for you, it boils down to affordability and practicality—if you can’t afford a charge card or don’t need an unlimited credit limit, you’re better off sticking to a regular credit card.
At Credit Karma Blog, what goes around comes around… So what do you think about this post? Agree, disagree, or have something more to say? We’d love to hear your reactions!
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Great explanation! I get this same question at least half a dozen times each week. I may just refer individuals to this post for the answer.
Great idea, but will this work over the long run?