What is a charge card and how is it different from a credit card?

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A charge card is one of many forms of plastic that you can keep in your wallet (or virtual plastic that you can keep in your digital wallet app). It looks, feels, smells and tastes like a credit card, but there are some important differences between the two.

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Here’s what you need to know about charge cards, how they work, how they’re different from credit cards and why you might (or shouldn’t) want one.

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What is a charge card?

A charge card is a payment method that is similar to a credit card but has no preset spending limits and must be paid in full each month. A charge card doesn’t come with a minimum payment option like a credit card, and there will be a late fee if you don’t pay the balance monthly instead of letting it earn interest on your balance.

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Charge cards are fairly rare for individuals (you’re more likely to see credit cards), but you may see this credit option for cards offered by gas stations or retail store chains (though many store cards are regular credit cards as well. ).

Most balance charge cards are designed for businesses or high-income individuals.

The terms “charge card” and “credit card” are often used interchangeably, but they are not the same type of account. The main difference is how you pay your charges to the creditor.

charge card vs credit card

Features Charge Card Credit Card

transactions

Swipe or enter number to shop on credit

Swipe or enter number to shop on credit

spending limit

Yes

No

minimum payment

Yes; 1% to 2% of the statement balance + int. and fees

n/a

interest

on average 16% to 36%

not specific; 18% to 26% if applicable

credit reporting

payment, balance, credit utilization

payments, balance transactions

Either transaction usually looks the same: You swipe a card or enter the card number, and the creditor covers the purchase. You earn a balance when you make purchases with the card, and you pay it to the creditor so that your balance goes back to $0.

spending limit

Credit card accounts come with a credit limit, the maximum balance you can deposit on the card before it will no longer let you make purchases. The charge card does not come with a spending limit.

Minimum payment and interest

For both credit cards and charge cards, you receive a monthly statement that shows how much you have spent and how much you owe.

A typical credit card monthly statement includes:

Details Balance: Total charges accrued till the last day of the billing cycle. Current Balance: All charges including any charges you have made since the last day of the billing cycle. Minimum Payment: The amount due by the due date (usually within a month), typically a combination of 1% to 2% of your statement balance, plus interest and fees accrued during the billing cycle.

You can “keep on” your credit card payments by making only the minimum payment each month, even if you have a balance on your card each month. As long as you keep the balance, it will earn interest based on the rate in your contract (which can be variable and change slightly over time).

Conversely, a charge card requires you to pay the entire outstanding balance each month (or billing cycle). If you don’t pay in full by the due date, you’ll have to pay a late fee, and you won’t be able to make additional purchases until you’ve paid the balance. No interest is paid on your balance.

credit score

Charge cards and credit cards can affect your credit score slightly differently.

Credit utilization – how much you have used your available credit at any given time – is a major factor in determining your credit score under most models. Credit cards play a major role in this. Your credit utilization is often the difference between your current balance and your total credit limit across all cards.

Since charge cards do not impose spending limits, your spending on those cards does not count towards credit usage. Neither VantageScore nor FICO (the leading scoring model) take charge card balances into account when calculating usage.

That doesn’t mean your charge card balance doesn’t affect your score. Debt is still usually reported to credit bureaus, and unpaid bills can negatively affect your score while a timely payment history can have a positive effect.

Prize

Both charge cards and credit cards can come with rewards programs that let you earn points for cash, statement credit, flight miles, hotel points or other perks, depending on your spending. Charge cards associated with a store or gas station brand are likely to offer only store credit for that brand, while credit cards often offer a wider range of rewards.

How do charge cards work?

Using a charge card is a similar experience to using a credit card at the time of a transaction: You swipe the card or enter the card number to make a purchase, the card issuer covers the purchase and you transfer the balance to the issuer. give amount.

Charge cards don’t come with a limit on your available credit, so you can spend as much as you want on the card. All you need to do is pay off the entire balance each month or in a billing cycle, instead of just the balance plus accrued interest. You may incur charges for late payments and will be unable to collect new charges until the outstanding balance is paid.

Advantages and disadvantages of charge cards

There are pros and cons to using a credit card. We’ve gathered the most prominent of them to help you decide if a charge card is the right move for you.


professionals

No spending limit No interest on outstanding balance Difficult to collect debt that you can’t manage Spending doesn’t affect credit utilization


Shortcoming

May not be offered by most card issuers May be limited to specific brands, such as gas stations or retail stores Often available to businesses or individuals with excellent credit and high income Charge card alternatives

The modern alternative to the charge card is the credit card. Most issuers have dropped their charge card offerings and replaced them with credit cards.

Credit cards come with a few drawbacks compared to charge cards, and it is easier to accumulate debt that increases with interest and late fees, especially if you have a high credit limit. However, credit cards come with better rewards programs than charge cards.

If you’re looking for a way to shop without cash and want to keep your spending within the amount you can pay within the month, a debit card is also a good alternative to a charge card. Debit cards are linked to your checking account, so you can only spend money you already have.

If you have erratic income or cash flow and sometimes need a small credit to float until payday, you can open an account with a bank like Chime or Varo, which offers low-cost Provides cash advance. This option is similar to the overdraft protection of a normal checking account, but comes with much lower fees and better bumpers so you can avoid spending seriously more and accruing endless fees.

Frequently Asked Questions (FAQs) About Charge Cards

We’ve got answers to most frequently asked questions about charge cards.

What is the purpose of a charge card?

A charge card is a payment option that gives you credit for making a purchase and paying for it later. They are often available to businesses or high-income individuals. They help you improve cash flow by allowing you to make purchases anytime and pay your balance in full every month.

What credit score do I need for a charge card?

Most charge cards require an excellent credit score (around 750 and above) and a high income.

Are there fees associated with the charge card?

Like a credit card, a charge card may come with an annual fee, and you’ll pay late fees for overdue payments. If you have good to excellent credit, you should look for charge cards that have no charges and that pay a welcome bonus. Here are the nine best credit cards for 2022 with no annual fee.

What is the interest rate on a charge card?

Charge cards typically do not charge interest, as do credit cards. Instead, your dues are payable in full every month. Some charge cards include the option to pay in installments over time, and they will include an interest rate. A typical charge card APR is slightly higher than a credit card, so it can range from around 18% to 26%, depending on the issuer.

Contributor Dana Miranda is a Certified Educator in Personal FinanceĀ® who has written about work and money for publications including Forbes, The New York Times, CNBC, Insider, NextAdvisor and Inc. Magazine.

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