What are the differences between Charge Cards and Credit Cards?
The simplest payment option, carried by most of us, is a Debit Card. A Debit Card uses the balance that actually exists in your account. You spend the money in your account with the option to have a small overdraft. If there isn't any money in your account, then your payments aren't made.
However, many of us now need to have access to extra money instantly. We sometimes need to pay bills or make a purchase before we have the money in our bank account. This is when our spending power can be increased by a Charge Card or a Credit Card.
What is a Credit Card?
Credit Cards allow you to create a "line of credit" where the Credit Card provider allows you to borrow money from them. This credit facility allows you to spend up to an agreed credit limit. At the end of each month you are charged interest on your balance.
By borrowing money through a Credit Card you enter into a contract; obliging you to pay back the balance owed with interest charges.
What is a Charge Card?
A Charge Card does not extend a line of credit to you. Charge Cards require that the full balance of money that you spend each month is repaid. If payments are not made promptly then a penalty fee is applied to the account.
This may sound similar to a Credit Card but Charge Cards do not have interest rates and do not carry spending limitations. They are often used to offer exclusive perks and Membership Rewards to the customers.
Both credit and Charge Cards let you delay payments.
They both place you in an agreement to repay the money you spend in a set period and have penalty fees if payments are not made.
However, they are different in a number of ways.
1. Interest rates
All types of Credit Card charge interest rates. The interest rate (Calculated as APR – Annual Percentage Rate) is determined by the type of Credit Card you hold and your CIBIL credit score.
Conversely, Charge Cards do not have interest rates as a balance cannot be carried forward from month to month. There is no actual credit offered – so you don’t have to pay interest.
Whichever type of Card you hold it is always advisable to pay off the balance before it becomes due. This way you can completely avoid paying interest or charges.
2. Credit limits
Credit Cards come with spending limits. These limits are decided based on your credit rating. Card issuers use this to determine your suitability for a Credit Card. As you continue to use your Credit Card, your credit score improves – making it easier to get a higher credit limit.
Charge Cards have no credit limits. Instead they have higher penalty fees which encourage you to pay the balance in full each month. Providing you pay the balance each month, you can enjoy unlimited credit without charges. Like Credit Cards, Charge Cards when used responsibly, help to increase your credit score.
3. Card balances
Credit Card balances accrue interest each month. Different interest rates are applied for different uses of a Credit Card, for example balance transfers, cash advances and payments for goods and services. The interest rate is added to the outstanding balance on the Card.
With a Charge Card the outstanding Card balance is paid straight from your bank account. Many people choose to pay Credit Card balances by direct debit to avoid interest charges.
4. Card charges
American Express Credit Cards may or may not have annual fees. All Credit Cards charge interest on outstanding balances for purchases, balance transfers and cash advances.
American Express Charge Cards offer a range of member benefits for an annual fee.