Though these two terms are sometimes used interchangeably, charge cards and credit cards are not the same. While a charge card could be considered a type of credit card, it comes with some distinct features that borrowers should understand. Here’s a quick overview of the difference between a charge card and a credit card.
The Difference Between a Charge Card and a Credit Card
1. Charge Cards Require Paying Balance in Full
Credit card users who don’t pay their balance off in full at the end of the month know they’ll get hit with paying interest on the balance… but making a minimum monthly payment on time is all that’s required to keep a typical credit card account in good standing. A major difference between a charge card and a credit card is that, with a charge card, you’re required to pay the balance off in full each month.
This is an important distinction for small business owners considering a charge card instead of a credit card. With a credit card, if cash flow is tight one month, you do have the option to make just the minimum payment. There’s no option like that with a charge card, though—if you don’t pay off your balance in full, you’ll risk damaging your credit score and face heavy late payment fees.
2. Charge Cards Carry Heavy Late Payment Fees
Late fees on charge card balances can feel pretty painful. But don’t forget that, unlike with a credit card, you’re not supposed to carry a balance at all on a charge card. Instead, you’re meant to pay it off in full at the end of each billing cycle.
American Express, which has the lion’s share of charge cards in the United States, charges $25 the first time you’ve got a late payment on your charge card. This rises to $35 for the next late payment within the following 6 billing cycles, and then to $35 or 2.99% of the outstanding amount if you’re late with two or more payments in a row.
Compared to American Express’s regular credit cards that come with a late payment fee of the lesser of $25 or your minimum payment amount, charge card late fees are significantly more expensive.
These first two differences highlight just how far apart charge cards and credit cards can be, especially when it comes to when and how you pay off your balances.
3. No Interest Rate?!
Another difference between a charge card and a credit card that small business owners should be aware of is that charge cards don’t charge interest.
Yup, you heard that right. Charge card borrowers have to borrow money interest-free—as long as you pay off the noted balance before your next statement date. This goes hand-in-hand with the charge card rule of not carrying a balance: after all, why set an interest rate for balances you’re not supposed to carry?
4. No Preset Spending Limit on Charge Cards
Maybe the most appealing difference between a charge card and a credit card is that a charge card doesn’t have a spending limit—while a credit card does.
This doesn’t mean you can—or should—swipe that charge card in a spending frenzy… Your lender could always impose some boundaries on your spending. But not having a pre-set spending limit does let small business owners seize time-limited opportunities that require immediate access to cash.
Instead of waiting for a loan approval, business owners with charge cards can immediately purchase the inventory or supplies they need to complete a large rush job. They then pay off the balance in full at the end of their billing cycle.
With a credit card, you can only borrow up to your pre-set credit card limit, usually determined by your income and credit score. To increase your credit card limit, you’ll need to contact your lender for a limit increase. This could mean re-qualifying by providing up-to-date income verification, plus authorizing a new credit check.
5. Charge Cards Work Best for Creditworthy Applicants
Another difference between a charge card and a credit card: qualifying for a charge card requires a stronger credit score than you’ll usually need for a credit card, so it might work best for creditworthy borrowers. With no preset limit, the lender wants to minimize their risk of borrowers defaulting—so they’re going to pay particular attention to your credit score.
Once you have a charge card, make sure to stay on top of payments, or else you might find your credit score taking a beating.
Understanding the difference between a charge card and a credit card could help you make better financing choices when it comes to borrowing those short-term funds you need for growth. Let’s summarize:
A credit card is a more flexible option if you want the option to make just a minimum monthly payment and carry a balance without late payment fees. A charge card can be a good tool for a small business owner who can pay off their card balances within a short time frame. Remember to plan your charge card spending and carefully monitor your cash flow so you can pay off the balance in full—every time.
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from Fundera Ledger https://www.fundera.com/blog/2016/03/18/difference-between-a-charge-card-and-a-credit-card/