The Difference Between a Charge Card and a Credit Card

The Difference Between a Charge Card and a Credit Card

Credit cards and charge cards are two distinct types of financial instruments, despite the fact that the terms are frequently used synonymously. You are able to make purchases without using cash with either card; however, there are some significant distinctions between the two that you should be aware of before applying for either card. Charge Cards

  • Require full payment every month
  • No hard spending limit
  • Usually high annual fees
  • No interest since must be paid in full
  • Not as widely accepted
  • Typically require very good credit
Credit Cards
  • Allow a minimum payment each month
  • Strict spending limit
  • Low or no annual fees
  • High interest rates if you don't pay in full
  • Accepted by most sellers
  • Some cards available to those with lower credit scores

The Significant Variations

Charge cards are a form of credit card that differs from traditional credit cards in that they force you to pay off your entire balance at the end of each billing cycle as opposed to making minimum payments on the balance each month for an extended period of time. Because you are required to pay off the balance of your credit card each and every month, having a charge card compels you to be more careful with your spending. On the other hand, if you use a credit card, you will be able to carry a revolving balance that you will be able to pay off over a set amount of time. Consumers are drawn in by the ease of low minimum payments, yet, this might lead some people to quickly get themselves into credit card debt. Because certain charge cards don't have a predetermined credit limit, the amount of money you can spend appears to be virtually unrestricted while using these cards. However, charge card issuers do have a spending limit that is considered to be a "soft limit" for your charge card. This limit is based on what the credit card issuer believes you can afford to repay each month based on your income, spending, and payment behaviors. On the other hand, credit cards come with a predetermined limit on how much you can spend, which is determined at the time you are approved for the card. Your credit limit will typically remain the same unless you are granted permission for an increase in your credit limit or your credit card issuer decides to cut your credit limit. If you go above the limit on your credit card, you could face financial penalties. For instance, if you exceed the credit limit on your revolving credit card, you will be subject to a fee for going over the limit, and, in some cases, you will also have your interest rate hiked. In order to qualify for a credit card, you will normally need to have a solid credit history. However, despite having a lower credit score, you should still be able to obtain at least some credit cards.  American Express is the only card issuer that exists today that still provides charge cards.

When Compared, the Fees

Because the card provider won't let you carry a balance on your account after the grace period has ended, you won't have to worry about paying any interest on a charge card debt. You will, however, be subject to a severe penalty if you are unable to pay off your entire sum by the due date. Depending on the rules of the card, the late charge could either be a fixed rate or a percentage of the total amount owed. When you don't make your minimum payment by the due date, you'll be subject to a late fee, which is also associated with credit cards. The maximum amount that can be charged as a late fee on a credit card is $40. However, this can only happen if the cardholder has missed two or more payments within a period of six months.  Credit cards always come with an interest rate, while charge cards do not, and the rate on credit cards is typically quite high. Because the interest rate has such a direct bearing on the total amount that you are required to pay while you carry a balance on your credit card, it is one of the most essential aspects of a credit card. If you pay off your monthly credit card debt in full and before the grace period expires, you can avoid having to pay any interest on that balance. The yearly fee that is associated with charge cards is typically waived for the first year of card membership. They can be highly pricey, reaching up to $500 for some high-end cards in some cases. It is typically not difficult to discover a credit card that does not charge an annual fee, despite the fact that some credit cards have a smaller annual fee than others.

Other Advantages and Limitations of Using a Charge Card

While compared to credit cards, the benefits that come with charge cards are typically more generous; therefore, it is important to take this perk into consideration when deciding between various card possibilities. Charge cards, on the other hand, do not provide the option to carry a balance or to get cash advances. You will need to have a credit card in order to complete either of these types of transactions. If you do not have a credit card, you will not be able to complete either of these types of transactions. To add insult to injury, you won't be able to use your charge card anywhere you would normally be able to use a credit card.

The Bottom Line 

Charge cards are an excellent choice for customers who have an excellent credit history and the financial wherewithal to pay off their balances in full at the conclusion of each billing cycle. These cards come with a number of useful benefits, which can be used as an incentive to refrain from buying more than you can afford. On the other hand, if you're searching for a card that offers more freedom, a credit card might be the better option for you.

Questions That Are Typically Asked (FAQs)

When does interest get charged to credit card accounts?

After the due date of the statement, interest will begin to be charged on any balances that remain unpaid. The remaining debt from your previous statement will be carried over to your subsequent statement if you haven't paid it off in full by the due date listed on it. During the duration of the rollover, interest will be charged.

What is the optimal number of credit cards for me to have?

A decent rule of thumb is to have at least two credit cards, but the optimal number of credit cards for your circumstances is going to vary depending on how your finances are set up. It is beneficial to your credit score to have many credit accounts, but because the average age of your credit also plays a role in determining your score, opening multiple credit cards at the same time could have the opposite effect.

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