Credit and charge cards have drawn attention in recent years. They’re two convenient ways to make purchases without having to worry about having cash. Also, issuers have been stepping their games up to offer rewards and perks to entice customers.
If you’re interested in getting a charge card or a credit card, there’s a lot of things you have to know. Today, we’ll be discussing these two payment options to help you decide which to get.
What is a Charge Card?
A charge card is a type of payment card that doesn’t charge any interest. Charge cards are also branded and can be used wherever the brand is accepted as payment.
And while there’s no interest, charge card users are required to pay their balance in full once they receive the statement.
Generally, not a lot of issuers offer charge cards. But, those who do typically assign an uncapped spending limit. Additionally, charge card issuers also provide rewards and benefits to cardholders.
The only possible downside to cardholders is the high annual fee ranging from $150 to $550.
How Do Charge Cards Work?
Charge cards look similar to credit cards and work in the same way for purchases and payments. Issuers typically offer the same features, like bonuses, rewards, and some travel perks.
However, unlike credit cards, charge card balances are required to be paid off immediately. This means that cardholders have no options to pay in portions. Because of this, there are no 0% interest promos and balance transfers.
Additionally, some big retailers have their charge cards for in-store use. However, most credit cards have replaced the use of these charge cards.
Advantages and Disadvantages of Charge Cards
Like many things in the finance industry, charge cards have advantages and disadvantages. In this section, we will be discussing why and why not charge cards are worth getting.
Advantages of Charge Cards
Here are the advantages of having a charge card:
1. There’s no pre-set spending limit.
As we’ve mentioned earlier, charge cards have no spending limit.
If you’re someone who likes to make big purchases, it’s probably an advantage. Additionally, it’s also helpful for business owners who spend large amounts of money.
However, “no spending limit” doesn’t mean that “unlimited spending” is allowed. Generally, “no spending limit” just means that the spending limit changes.
Keep in mind that charge cards still have limitations. These are based on how you use the card, your payment history, and your credit record, among other factors
2. There is no debt and interest.
Traditional charge cards don’t get you into debt, and this is because you have to pay in full every month. Because of this, there are also no interest fees.
3. Issuers offer many perks.
Charge cards come with many perks and rewards. Issuers typically offer tons of bonuses and perks to their cardholders, especially for traveling.
However, these rewards might not be as enticing because of the competition between charge cards and credit cards.
4. It impacts your credit score.
Charge cards help you build your credit when you use it responsibly.
As we’ve mentioned, charge cards have no pre-set spending limit. This means that credit scoring models can’t calculate your credit utilization or your available credit you’re using at a given period.
So, something good about charge cards is that you can spend all you want in a given month without affecting your credit score.
Disadvantages of Charge Cards
Here are the disadvantages of having a charge card:
1.There are late fees.
As we’ve said, charge cardholders are required to pay their balance in full every month. With this, failing to pay that balance will incur late fees, which can be as expensive as credit card charges.
Because of this, charge cards aren’t flexible when it comes to payments. Additionally, the issuer can also report your late fees, which can badly affect your credit score.
2. The annual fees are high.
While there are tons of perks and rewards that come with charge cards, using one will is quite expensive. This is because of the high annual fees that you pay the issuer.
As we’ve mentioned, these annual fees can cost you up to $550.
3. You need a good credit score.
If your credit score is on the bad side of the spectrum, getting a charge card might not be your option.
Charge cards require a credit score of 690 or higher. On the spectrum, that’s good to excellent credit. If your credit score is less than the required, it’s probably best to look for other alternatives.
What is a Credit Card?
Now that you know all about charge cards, it’s time we discuss what credit cards are.
A credit card is either made up of metal or plastic that is issued by a bank or any banking company. It lets you borrow money to pay for your purchases wherever the card is accepted.
And, aside from purchases, issuers also enable you to pay bills and sometimes even withdraw cash.
With credit cards, you’re given a standard credit line. However, you can request a different cash line of credit (LOC). Typically, this cash LOC comes in cash advances that you can withdraw from bank tellers or ATMs.
Aside from these, credit cards have a rule that requires cardholders to repay the borrowed funds with interest. Lastly, you have to keep in mind that credit card issuers often charge a high annual percentage rate.
How Do Credit Cards Work?
As we’ve said, you can pay your purchases and bills using your credit card.
When you use your credit card to do these, your card details are provided to the merchant’s bank. That bank asks for authorization from your credit card issuer to process the purchase.
Once your credit card issuer verifies your transaction details, the issuer either approves or declines it.
If it gets approved, the payment is sent to the merchant while your available credit decreases by the same amount.
After your billing cycle, the issuer sends you a statement that reflects all the transactions you made in that month. The statement also includes your previous and new balances, payment due, and due date.
If you’re unable to pay for the balance in full, that’s when your issuer charges you with interest.
The Pros and Cons of Credit Cards
Now you’re familiar with what a credit card is and how it works, it’s time to know its pros and cons. In this section, we’ll briefly explain the good and the bad of owning a credit card.
The Pros of Credit Cards
Here are the pros of having a credit card:
1. Credit cards are convenient.
Like we’ve said earlier, credit cards allow you to pay for almost anything wherever they’re accepted. Additionally, if you have a credit card, you don’t have to worry about not having money on hand.
However, remember always to check your balance to make sure that your purchase can be covered.
2. Credit cards can be considered low-cost loans.
Say you have to make a purchase today but don’t have the money to do so. If you have a credit card, you can complete that transaction.
With credit cards, you can make the purchase and pay it off when you can. Just ensure that you’ll be able to pay it off when it’s due.
3. There are many perks.
Just like charge card issuers, credit card issuers also offer rewards and perks to their cardholders. There’s a lot of discounts and cashback promotions depending on the purchases you make.
4. You can make cash advances.
As mentioned earlier, credit card issuers enable cardholders to open a separate cash LOC. This way, you can get money anytime you need it.
However, keep in mind that issuers typically charge higher interest rates. With this, ensure that you can afford to pay the cash advance back.
The Cons of Credit Cards
Here are the cons of having a credit card:
1. Interest charges are often high.
Like we’ve said, credit card issuers charge interest rates when you don’t pay your balance on time. Because of this, you not only pay your purchases but the interest rate too.
As a result, you pay more than the actual price of your purchases.
2. There are several fees.
Besides the interest rate, there are several other fees that issuers can charge you with. Some have annual fees and cash advance fees.
Besides, some issuers charge a higher interest rate than others. There’s also a possibility that you pay more fees than you earn discounts and cashback.
3. It’s tedious to review credit card bills.
Issuers generally send credit card bills monthly. To ensure that your statement accurately reflects your transactions, you have to review it thoroughly, and this is a tedious process.
You also have to ensure no fraudulent uses when you review your bill, as scammers target credit cardholders often.
Charge Card vs. Credit Card: At a Glance
After briefly explaining what charge cards and credit cards are, it’s time to take a look at both of them side-by-side.
We’ve provided a table below to help you compare the two easily.
|Charge Card||Credit Card|
|Has a pre-set spending limit||No||Yes|
|You’re required to pay the balance in full monthly||Yes||No|
|Charges you with late fees||Yes||No|
|Charges an annual fee||Depends on the issuer||Depends on the issuer|
|There are many issuers to choose from||No||Yes|
How Do Charge Cards and Credit Cards Affect Your Credit?
Besides what we’ve already mentioned, there are also differences in how the two affect your credit.
While both help you build your credit score, there are a few differences that you have to take note of.
When you apply for charge or credit cards, there’s a high possibility that the issuer will review your credit profile. Typically, issuers conduct a hard inquiry that can affect your credit reports.
However, you don’t have to worry, as this typically has a minor effect on your credit score.
Utilization refers to how much credit you use from your available credit at a given time. Agencies consider this factor when computing for your credit score.
With a credit card, credit-scoring agencies compare your balance to your credit limit. If you get a low utilization rate, you’ll most likely get a higher credit score.
On the other hand, since charge cards have no pre-set spending limit, it’s difficult to compute, or agencies don’t compute it at all.
On-time payments significantly affect your credit score and lead to a better credit profile. Keep in mind that issuers report late payments to credit bureaus, which can affect your credit score and interest rate.
How to Choose Between Credit Cards and Charge Cards
Now that you know the differences and similarities between charge and credit cards, it’s time to choose between the two.
To help you decide, we recommend that you consider the factors below.
1. Interest Rate
As we’ve mentioned, charge cards have no interest rates because you’re required to pay in full. On the other hand, credit card issuers charge an interest rate when you don’t pay your balance on time.
If you’re a big spender and don’t worry about getting charged with interest, a credit card might work well with you. If you can afford to pay your bills in full monthly, then a charge card might be your better option.
Both charge and credit card issuers offer rewards and perks to customers. With this, you must compare these offers to get the best and most suited card for you.
3. Fees and Penalties
Like we’ve said, both charge and credit card issuers charge you with late fees. With this, comparing costs and penalties will help you get the best rates for you.
Charge cards and credit cards are both a convenient way to pay for your purchases. Besides this, both also help you build your credit score.
That said, getting either will help you in many ways. Just keep in mind that your best option will always depend on your needs and ability to pay.
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