Do you know difference between Charge Card and Credit card?

Certainly, a charge card and a credit card might appear similar, but they function differently. The primary distinction lies in the payment terms.

A credit card allows you to borrow money up to a certain limit and carry a balance from month to month, meaning you can pay off your purchases over time. However, interest is typically charged on the outstanding balance.

On the other hand, a charge card doesn’t have a pre-set spending limit but it necessitates that the total bill be paid off at the end of each billing cycle.

This means you must pay your balance in full each month, and you won’t be able to carry a balance over to the next month like you would with a credit card.

Both types of cards have their own benefits and drawbacks, and the choice between them largely depends on your spending habits and financial management.

What’s Ahead

  1. Charge Card Vs Credit card
  2. How charge cards work
  3. Benefits of charge cards
  4. Drawback of charge cards
Do you know difference between Charge Card and Credit card
Do you know difference between Charge Card and Credit card

The key difference between Charge Card and Credit card

Here are The key difference between Charge Card and Credit cards, explained below table.

Types Charge Cards Credit Cards
Part Payment There is no part payment like 5% or 10% of Credit dues; you need to full payment every month. Credit cards allow you to make a minimum payment each month, like 5% or 10%.
Credit Limit There are no pre-set credit limit The credit limit is pre-set. You need to follow Strictly. Otherwise, a penalty will be levied.
Annual Fees Normally high annual fees There may be no annual Fees or deficient annual fees.
Late Fees payment There is no concept of late payment fees, and you have to pay bill dues within a month; otherwise, penalties will recover heavy penalties from you. Late payment is allowed with late fees
Interest Payment No Interest payment, since bill dues amount must be paid in full. You will be charged high-interest rates if you do not pay in full.
Acceptance Not as widely accepted Accepted by most sellers
Credit Score It would be best if you had an excellent credit score for getting a charge card. You get a credit card without a Credit score ( Like a Secured credit card)
Selection of card issuers No, Most of the card issuers does not issue Charge Card You can select the Best Credit card out a large pool of Credit card issuers.
Credit Utilization No problem of increase in Credit Utilization as a limit is not pre-set. It would be best if you did not use more than 30%of the Credit limit.
Summary of Difference between Charge Card & Credit Card

How charge cards work

While charge cards bear a physical resemblance to credit cards in their design and function in a similar manner, they possess distinct attributes.

The benefits and features of charge cards often parallel those of credit cards, encompassing rewards programs and additional perks.

However, the financial structure of a charge card is uniquely designed for immediate payment, meaning it does not provide options for balance transfers or 0% APR offers typically associated with credit cards.

This distinct feature necessitates careful financial planning and discipline, as balances must be paid off in full each billing cycle.

Benefits of charge cards

Below are the detailed benefits of a charge Card over a Credit card, which will help you decide to take a charge card or Credit card.

(1). No preset Credit limit

Credit cards have a pre-determined Credit limit based on credit history, your cash flow/Income, and other eligibility criteria determined by the credit card issuer.

At the time of credit card application, normally, credit card companies tell you the credit limit. Your credit limit is disclosed on the welcome offer letter, or you can check on Net-banking/Credit card app.

By contrast, Charge Card does not have a preset Credit limit, and You can use your maximum credit limit decided based on your spending habits, income, and creditworthiness.

In theory, you have “No preset spending limit,” but that is not the case in practice. The ChargeCard issuer institution shall adjust your “No preset Credit limit” over time, based on your previous charge card balances and payment history.

American Express is the oldest Charge Card issuer, and they have an option to check your spending power at any given time. You can also check the Credit Limit on Amex mobile app, but you can only check a certain number of times per day as a fraud prevention measure.

(2). No Chance of carrying debt and interest

On Charge Card, you need to pay off the full balance every month. Otherwise, you will have to bear a steep penalty if you don’t pay your full balance within the due date. The late fees can be a flat % of the balance amount or a fixed amount as disclosed in terms and conditions.

Charge card tech you discipline for paying Credit balance every month. You can avoid high-interest rates on credit cards by having a Charge card in your wallet.

By contrast, Credit Card has built-in interest payment options. Like, convert big spending into Small EMI. Interest rate is normally higher than a personal loan in credit card EMI.

(3). Bigger Rewards and perks than Credit Card

Charge cards have built-in systems for generous spending rewards, especially for travels. However, they have stiff competition with credit cards or some credit cards better than Charge cards. If I recall, Chase-Sapphire-Preferred is a better credit card than a charge card.

(4). Benefits of Lower credit Utilization

You would be surprised that many modern credit scoring models do not count Credit limits or credit utilized in Charge cards, which means even if you fully utilized limits sanctioned on a charge card, they will be ignored when evaluating your credit utilization.

However, if a credit institution uses an older version of the FICO Score, the Charge card may still be counted into utilization calculations. That may affect your credit score.

Let’s understand the situation with some examples.

Situation -A

Your Credit institution/Lenders uses an older version of the FICO Score.

Suppose the highest historical balance on your charge card is $1,000, and your current balance is reported $500 to the credit bureaus. Older versions of FICO shall take into calculation your charge card to be 50% utilized even if your approved credit limit is far more than $1,000.

In this situation, Credit utilization will be high, and credit score shall decrease consequently.

Situation -B

Your Credit institution/Lenders uses a new version /modern model of the FICO Score.

If Credit issuers/lenders use only the new version/Modern credit scoring model, they shall exclude the credit limit utilized in Charge Card. That may be beneficial to you.

Drawback of charge cards

(1). Extortionate Late fees

On a charge card, you have to clear the monthly balance in full. Otherwise, you will have to incur an Extortionate late fee.

If you have American Express® Platinum Card, a charge card, you have incurred 30% of the balance amount as late fees payment that is the highest in the industry.

And also, charge card issuers can report late payments to the credit bureaus, which can damage your credit score just like any credit card issuer can.

By contrast, on a Credit card, you always have an option to pay the minimum balance( Like 5 % or 10 % of the total Credit card balance) and avoid late fees payment.

(2). Very high Annual fees.

Normally, Charge cards have steep, Annual fees. In India, American Express® Platinum Card charges Rs.60,000 as annual Fees, which is a charge credit card, on the other hand, that doesn’t require annual fees from cardholders.

(3). Excellent Credit Score needed

If you wish to have Charge Card in your wallet, you need to have a good to excellent credit score. Normally, FICO scores of 690 or more are considered a good score. If you are in India, you need to have a CIBIL score of more than 780.

Dhiraj Jha is a personal finance and credit card expert dedicated to providing valuable insights and advice on budgeting, saving, investing, and debt management.

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