Credit cards vs. charge cards – wait … there’s a difference?

Charge or credit? For the average consumer these two words are probably used interchangeably when it comes to making purchases with plastic. But there are a few distinct differences between charge cards and credit cards, as well as benefits and pitfalls that come with both.

“The confusion between the two is understandable and I don’t think most consumers appreciate the difference,” says credit card and travel journalist Jason Steele. “That difference is narrowing more and more, but it’s still important to understand the distinction.”

What exactly is a charge card?

In almost every respect a charge card works the same was a credit card does, with two key exceptions: payment parameters and spending limits.

In short, credit cards are considered revolving accounts, which means they don’t have fixed amortization schedules and don’t need to be paid off every month. Yes there’s a minimum payment requirement every 30 days—which includes monthly interest plus a portion of the principle—but as long as the minimum payment is made, consumers can carry a balance for as long as they’d like.

Conversely, a charge card’s balance must be paid in full every month, and failure to do so results in hefty late fees.

“This is the most important difference to understand,” says Scott Bilker, author of “Talk Your Way Out of Credit Card Debt” and creator of DebtSmart.com. “Even if you pay 99 percent of your charge card bill, you’re still going to be hit with a substantial late fee, which is often around 3 percent of the total original balance. And that works out to be in the neighborhood of 36 percent APR. Not good.”

Secondly, unlike credit cards, a charge card has no credit limit, which can make them particularly enticing for high rollers and business owners.

“One of the possible benefits of a charge card is if you’ve got a big purchase to make that you know you can pay off at the end of the month,” says Bilker. “But at the same time the lack of spending limits doesn’t mean you can go out and buy a Lamborghini on your charge card—unless you’re someone like Mark Zuckerberg.”

Who offers charge cards?

According to Steele, charge cards used to be much more ubiquitous, particularly in the retailer sector.

“It stems from the old days of running a tab at a local store,” says Steele. “You make purchases on credit and the owner knows you’ll be good for it at the end of the month.”

But the charge card landscape has virtually disappeared over the past few decades, and the only major provider remaining is American Express (a CreditCardForum advertising partner), which offers a few charge options for those who want to avoid spending limits and don’t mind steep annual fees.

Perhaps the most accessible charge card option for everyday consumers is the American Express Premier Rewards Gold Card. There’s no annual fee for the first year (it’s $195 thereafter) and borrowers earn 3 Membership Rewards points per dollar spent on airfare booked through airlines, 2 points at gas stations, restaurants, and supermarkets, and one point on all other purchases.

Conversely, the American Express Platinum Card will earn you 5X rewards on flights booked directly with airlines or with American Express Travel and on eligible hotel bookings booked on amextravel.com. It also comes with complimentary airport longue access at more than 1,000 locations, a $200 credit for incidental airline fees like baggage check and in-flight meals, and automatic Gold status in both the Hilton Honors and Starwood Preferred Guest programs. However, it also comes with an intimidating $550 annual fee.

“In my experience, the Premier Rewards Gold Card is the best medium between all the charge card options like the Platinum and Green cards,” says TopCashBack.com personal finance expert Natasha Rachel Smith. “The Gold Card allows consumers to benefit from the card while skipping the annual payment on the first year. Although this charge card is generally more expensive than comparative credit cards, the charge card holder enjoys some added benefits that might be worth it.”

Steele points out that American Express now offers a Pay Over Time option for eligible purchases of $100 or more on their charge cards, further collapsing the difference between charge and credit cards.

“In many ways the American Express charge cards are a brand relic more than anything else,” says Steele. “If you have a charge card with a Pay Over Time function, it’s pretty much just like having a credit card. Of course calling it a charge card still has this sort of premium feel to it that some people like.”

Is a charge card right for you?

To be sure, charge cards are not for everyone, and many personal finance experts struggle to find reasons to recommend them.

“To my mind the benefits of a charge card are pretty incidental,” says Steele. “You get just as many benefits and rewards perks from credit cards like the Chase Sapphire Reserve and the Citi ThankYou Premier—and you don’t have to worry about paying the balance every month if for some reason you can’t.”

That being said, here are a few reasons why you might consider getting a charge card:

  • If you need help with debt prevention. Some folks like the imposed discipline of paying off a balance each month. If that’s the case, a charge card might help you avoid credit-score-damaging procrastination.

    “If you’re someone who needs to be forced to pay off your credit purchases every month so you don’t carry a balance, then charge cards can be a good fit for you,” says FitSmallBusiness.com financial analyst Jeff White. “Charge cards can also help some individuals pay more attention to what they’re spending because they know they don’t have the option of floating a balance.”

  • If the rewards and benefits are attractive. While most major credit card companies offer very competitive rewards programs, the ones that come with American Express charge cards can be enticing.

    “For the right person these rewards can be attractive,” says Andrew Housser, co-CEO of Freedom Debt Relief. “They can include travel insurance, lost-baggage protection, warranty protection, hotel room upgrades, points and sometimes even tickets for entertainment events. For someone who perhaps travels often or runs a business—and knows they can and will use these benefits—a charge card can be an asset.”

  • If you have the cash flow to pay your balance. Most importantly, you need to go into the charge card game with an ability to pay your balance in full each month.

    “If you’re even a little bit concerned about not being able to pay back what you spend in a given month, then you shouldn’t risk your credit with a charge card,” says White. “If you don’t pay back your balance in full each month you could very quickly be charged a large amount in fees—and see a quick negative impact on your credit report as a result. Missing a monthly payment from a credit card brings a lot slower action, in most cases, than missing a charge card payment, which can feel like the cavalry is coming for you.”

 
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