Credit and charge cards might appear identical on the surface, but both are distinctly different. Of course, both cards help you make a purchase without cash and pay it off later — however, the difference between both lies when the bill comes.
With credit cards, you can carry a balance and pay it off over a period of time while an interest is incurred for it. Regarding charge cards, the balance should be paid completely when the monthly statement arrives.
Let’s dive deeper into the differences between how credit cards and charge cards work and identify which is better suited for your needs.
Charge cards don’t have a preset credit limit, unlike credit cards. However, this does not mean there is no maximum on your monthly spending with a charge card. Instead, the issuer will set a spending limit based on income, spending habits, and so on. They will consider your credit record, payment history, and other aspects of how you use the card to determine a limit that aligns with your needs and risk factors. This makes charge cards a helpful tool when running a business or spending heavily.
On the other hand, credit cards have preset credit limits that the issuer determines during the approval process. An individual’s credit limit will depend on their credit history, credit score, and income, among other factors. You can have your credit limit increased with a credit card, but this requires approval from the issuer. Moreover, it is recommended that you avoid spending over 30% of your available credit limit because doing so could cause your credit score to drop. This is not a matter of concern with charge cards because they do not have a preset spending limit.
Balances must be paid off in full every month with a charge card, meaning an APR is not usually charged. But if you miss a payment, you will have to pay a late fee or even risk the suspension or closure of your account.
With credit cards, a fixed or variable APR on any balances will be charged and carried from month to month. An interest on cash advances or late payments will be incurred, too. This is why credit cards can quickly become debt traps if they’re utilized by someone who lacks discipline in spending. However, if you can pay your balances in full by the end of each month, credit cards can help cement a favorable financial history, thereby improving your credit score.
Many credit cards don’t charge annual fees. However, charge cards carry a yearly cost of ownership that is quite substantial. In fact, some American Express charge cards carry annual fees that amount to hundreds of dollars!
Rewards & Benefits
Most charge cards feature exceptional rewards and benefits, particularly for people looking for travel-related perks. Moreover, the flexible spending options that most charge cards offer allow users to make great rewards-earning potential, which is often dependent on meeting stipulated payment conditions.
Conversely, credit cards offer higher rewards than charge cards, and most people consider them even better. For instance, the Chase Sapphire Preferred® Card is a travel credit card packed with features and compares well with American Express’s charge cards.
Credit Score Impact
When used responsibly, both credit and charge cards can help build your credit. However, the difference lies in something called credit utilization. This is where new scoring models do not consider charge card balances as part of the scoring criteria. Credit utilization indicates how much of your available credit is being used at a given time. The scoring models cannot calculate that ratio since charge cards don’t have a preset limit. As a result, charge cards have an advantage in how you can spend without hurting the utilization aspect of your credit scores.
Whether you want to get a credit or a charge card depends on your unique financial circumstances and individual goals. With charge cards, you have the advantage of preventing overspending and building up debt. However, there are not many options you have to choose from. Besides, there is also the aspect of the high annual fees to consider.
On the other hand, you have many more choices with credit cards. However, it’s also easy to stack up on debts by revolving a balance. Therefore, there is no hard and fast rule regarding which type of card you should get. There are differences, benefits, and disadvantages associated with both, but understanding how each works can help you make a financially sound decision.