They might sound the same, but charge and credit cards are quite different, and it's not uncommon for people to think of them similarly.
Let's clear the waters and reveal the differences between the two starting with the often misunderstood charge card.
What Is a Charge Card?
A charge card is a line of credit that must be paid in full at the end of the billing cycle, typically monthly. These cards tend to be offered to the most credit-worthy of borrowers as they usually do not have a spending limit.
It is important to note that no preset spending limit does not mean unlimited spending. Purchases are approved based on a range of factors, like the amount charged, the amount of spending over time, or how long you have been a borrower in good standing.
Using a charge card affords users several benefits over using a credit card. No interest is paid when balances are paid in full at the end of each billing cycle. Also, the lack of a spending limit offers improved cash flow to those that need something now with the intention of paying it off in several weeks.
Many charge cards also offer substantial points for rewards as a way to encourage their use.
You might be wondering how charge card issuers make their money. They typically rely on annual fees and charges to merchants based on a percentage of the transaction.
What Is a Credit Card?
Most of us are more familiar with credit cards as they are tremendously more popular than charge cards in terms of the number of users.
A credit card has a set spending limit, and you may spend however much you wish of that limit. When the total of your transactions reaches or exceeds the limit, further use of the card will be declined. It's crucial to stay up-to-date on card balances to bypass a problematic situation, especially if the card charges over-limit fees.
Your credit card lets you carry balances beyond the billing cycle, allowing you to make a small minimum payment and have interest assessed on the balance.
Credit card issuers might charge annual fees if the card comes with better perks, and merchants will also have to pay a percentage of the charge to the card issuer. Despite those two sources of income, credit card companies profit the most from interest charged to cardholders that carry their balances from month to month.
What are the Differences?
The distinct differences between credit cards and charge cards include the following:
Card limits: While a charge card has no preset spending limit, a credit card will come with a defined limit. Bear in mind that both types of cards consider borrower behavior and creditworthiness for future transactions but approach further use of the card differently. Limits might be raised or lowered for a credit card over time, whereas a charge card might restrict or approve more purchases.
Payment terms: A charge card requires payment of the balance in full at the end of the billing period, whereas a credit card allows cardholders to pay anywhere from a minimum amount to the entire balance. Credit cards carry the balance forward when less than the total balance is paid.
Interest rates: Charge card users pay zero interest due to paying their balances in full at the end of the billing cycle. Credit card holders have interest assessed on amounts not paid in full at the end of the billing cycle, usually at a very considerable rate.
How Do Charge Cards Affect My Credit?
Because charge cards have no credit limit, they don’t factor into your overall credit utilization rate, representing the percentage of your total credit in use. Suppose the credit bureau reports that you are utilizing some portion of your total credit. In that case, it will not include anything undefined as part of the equation. It'd be problematic to express a utilization rate against potentially unlimited credit, although some billionaires might know how that feels.
Your balance is paid monthly, so there will also not be an amount reflected in your utilization rates, negatively impacting your credit. However, the monthly, on-time payments are very positive on your credit report making it just as essential to make sure you pay on time.
If you close a charge card, it might negatively impact your credit report due to reducing the average age of your credit history.
Finally, just like any type of credit, applying for a new charge card will show as an inquiry on your credit report, potentially lowering your score by a few points.
How Do Credit Cards Affect My Credit?
Just like charge cards, credit cards benefit or hurt your credit but tend to have a more significant impact due to their contribution to your credit utilization rate.
The total of all your credit cards will usually comprise most, if not all, of your available credit. Lines of credit also count as available credit but tend to be less common than credit cards.
Suppose a high amount of your available credit is being used. In that case, the impact on your credit score might be detrimental as it indicates a higher risk for lenders. The opposite may be said of low utilization of your available credit, and both situations are interpreted as an indication of the borrower's responsibility.
Like charge cards, making on-time payments is necessary to maintain and potentially grow your credit score. Also, closing a credit card, especially an older card, might reduce the average age of your credit history.
Finally, anytime an application is submitted for a new card, it does show as an inquiry on your credit report, which could result in a lower score.
Both charge cards and credit cards have their benefits and potential drawbacks. Either will help build your credit and have the equal capability to harm it.
When you evaluate which is better to use, weigh if you need the ability to carry a balance or wish to pay your balance in full at the end of the billing cycle. Lastly, decide if a limit matters or if your card usage requires the ability to make more significant charges.
Sometimes things go awry with either charge cards or credit cards, requiring access to additional funds. Integra Credit might be a solution if you need access to different credit options.
Apply through Integra Credit today to check the options available to you.