Charge Card vs Credit Card | What is The Difference?

5 minutes

Are you new to the world of finance and want to know the difference between charge cards and credit cards?

In today’s post we are sharing the main differences between Credit Cards and Charge Cards, and giving you insight into how both of these lines of credit work.

What are Charge Cards?

Charge cards are something most people generally remain a bit unfamiliar with. But before we get into that it’s best to explain a bit about the marketplace of charge cards in general.

American Express is currently the only issuer of general use charge cards in the United States. And while there are store cards that offer the same terms and conditions as an American Express Green, Gold, Platinum, or Black charge cards, the store cards can only be used in that one particular store (or stores if franchised/partnerships).

There have been a few other general use charge cards in American history, but most of them have been ultimately swept away in time through mergers, buyouts, etc.

It’s also important to note that your debit card provided by a bank is not considered a charge card; its just considered a debit card.

What are Credit Cards?

Credit cards are issued by a myriad of different providers in the United States currently and it’s the idea that based on your credit history/worthiness you can have a creditor extend to you a line of money worth a certain amount.

So in the case of Chase’s more famous travel card, the Chase Sapphire Reserve, the starting line of credit if accepted is $10,000.

When it comes to credit cards, you are given a line of credit based off your creditworthiness, or relationship with your bank if you choose to get your first card through them. After your credit card statement is ready, you will typically have 21 days to make a payment.

Credit cards carry annual interest rates (APR) typically around 24%. Another way of looking at it is like this: Annual rate is 24%… 24% divided by 12 months is 2% every month. So any remaining balance left on your card that was not paid off in full will get a 2% financing fee from your creditors. So put simply again, if you have $1,000 left to be paid on your card, you’ll get charged $20. Bringing your new balance you owe to $1020 the next month.

The upside potential of credit cards is it’s meant to provide flexibility if you’re in times of struggle/emergency. If you fail to meet the minimum payment required you’ll usually get a late fee, and if your payment is 30 days late, you’ll typically get a negative mark on your credit report. So at the very least make sure to pay off the minimums.

What is the Actual Difference Between Credit Cards and Charge Cards?

Okay, so this is the most crucial thing to understand so we will get this out of the way first. A charge card MUST be paid off in full every single month, while a credit card only has to have a minimum percentage of your purchase paid off every month.

Charge cards are an entirely different beast, even if you pay of 98% of what you owe on your charge card, you still will get hit with a late payment fee of $27 for your first offense, and $38 if done twice within a 6 month period.

American Express has been experimenting with a “pay over time” model for larger purchases but for the most part expect to pay off what you owe in full every month, or run the risk of having your account shut down and sold off to debt collectors, along with some negative remarks on your credit report.

When it comes to “lines of credit”, American Express has been rather secretive of how the determine what your “spending limit” is. It’s thought that American Express looks at what the highest purchase you made on your charge card is, and if you paid that off in full at the end of the month they multiple that limit by about 3.

So if you manage to buy something worth $500 and successfully pay it off, your spending limit might be in the ballpark of $1,500 before it declines at stores.

There is a tool on American Express’s website to double-check your spending power, but American Express does look at the behavior you take on it, so be sure not to try to narrow in your spending limit or that might be a bit suspicious (i.e. check to see if you can spend $1000, then $2,000, then $3,000, then $4,000 etc etc).

If your preset spending limit is not high enough on your American Express card, you usually can call right in and talk to a representative, if your story isn’t suspicious sounding, they may instantly grant you a higher line for a bigger purchase; however in some cases you might have to show a proof of funds in order to get the amount you want if it’s in the case of thousands and thousands of dollars.

How Charge Cards and Credit Cards Affect Your Credit Score

There are 3 main categories on your credit report and it’s important that you understand this section.

The main categories are, revolving accounts, installment credit accounts, and open credit accounts.

Installment credit accounts are debts that are on a fixed rate and are being paid off over time such as mortgages, car loans, student loans, etc.

Revolving accounts are accounts that have a line of credit you use to make purchases with, this means credit cards for example. In the revolving section, you have a set line of credit amongst your creditors like say $20,000, and the percentage used by you is taken into consideration. In plain English, this is a section of your credit report where there’s a ceiling for how much you can spend.

The last category is where charge cards fall into, and that’s open credit accounts. In an open credit account, this means that it does not revolve or roll over like revolving accounts. It means that there is typically something you are paying for as you use.

A good analogy for this section of your credit report is like the old phone plans that would charge you .20c per minute. It’s like that where it’s a utility that you are agreeing to pay off every month that has no pre-set limit but occurs as you use.

Why this is so important is because your AMEX charge cards fall into this last category, before you visit a loan broker or mortgage originator, it’s a wise idea to completely clear out your balance on the card.

If you have $2,000 on your AMEX charge card that month, an originator could see that expense on your credit report and think that it’s a utility you are paying off every month, when you might’ve only received that high balance because you’re buying plane tickets or needed your car repair (one time fee vs recurring fee).

Point being, if an originator sees a balance and thinks it’s recurring it could damage the rates or terms you’re trying to secure for your loan.

What Would Be Right for Who?

Charge cards can be great for businesses that expect cash flow positive months on month. It encourages financial responsibility and has useful features make it a good choice for business owners who want to get the most value out of their charge card, while also keep a laser-sharp eye on the accounting.

Credit cards are great for everyone, and can be just as competitive in many other ways, but also can allow mistakes to happen.

Really the differences can occur due to differences in life philosophies. What are your thoughts?

 

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