You’ve probably heard about charge cards and credit cards. While the two terms sound similar, there are plenty of differences. Depending on your financial goals, it’s important to understand these products so you can properly decide which card to select.
Let’s explore the differences and similarities between charge cards and credit cards.
What Is a Charge Card?
A charge card allows consumers to access lines of credit, just like a credit card, but the balance must be paid in full each month. There is no minimum payment or interest, as is the case with a traditional credit card. With a charge card, consumers are not allowed to carry a balance on the card.
If you charge $500 worth of groceries, gasoline and clothing on the charge card during a given billing cycle, you must pay that $500 by the due date written on the credit card statement. If you fail to pay the balance, you’ll be charged a late fee, although pricey interest expense will not apply, as is the case with a credit card.
According to American Express, which offers a host of different charge cards, a $27 fee is charged following a late payment on a charge card. If a user makes another late fee within the following six credit card statements, that fee jumps to $38. If two payments in a row are late, the fee will also adjust to $38 or 2.99% of the amount due — whichever is more. Just because there is no interest rate on a charge card, doesn’t mean there are no consequences for paying late or missing a payment.
When using a charge card (or even a credit card), it’s important to make sure you have the cash on-hand to pay back the balance in full. Even though a traditional credit card allows you to carry a balance on the card, you shouldn’t take advantage of this because interest charges accrue. Whether you’re using a charge card or a credit card, pay back the balance in full each month to avoid any type of financial consequences.
Plus, if you make a late payment on the charge card that will likely be reported to the credit card bureaus which will ding your credit score. Remember, a lower credit score usually results in a higher interest rate on a mortgage or car loan. A higher interest rate on these loans means higher monthly payments. A credit score is one of the most common ways lenders and banks assess your creditworthiness, or how responsible you are with money.
How Does a Charge Card Differ from a Debit Card?
A charge card is very different from a debit card. With a debit card, you are using your own money to pay for expenditures charged on the card. A debit card is simply linked to your bank account. If a grocery bill totals $55 and you swipe your debit card at the cash register in the store, $55 will be immediately deducted from your checking account and sent to the merchant. If you check your bank statement, you’ll see this transaction in real-time. It’ll show the name of the merchant and the amount of money that’s being transferred out of the account.
With a debit card, you don’t have to worry about paying back any money or waiting for a bill at the end of the month. This is because the items are paid for at the time you swipe your card. Instead of “buy now and pay later,” which sums up the charge card, with a debit card, you “buy now and pay now.” You also don’t have to worry about any late fees with a debit card, because there is nothing to “pay back.” It’s your own money.
The downside with a debit card is that none of the activity is reported to the credit bureaus. Debit card usage does not help build your credit history or credit score. Using a debit card to pay for things is similar to using cash.
Debit cards are typically given to consumers upon opening up a checking account at a bank. The banks like debit cards because the store merchant pays a fee to the bank every time you swipe the debit card at the cash register. Consumers, however, do not pay any fees for swiping the debit card. Think of debit cards as more of a convenience product, rather than a financial product. Sometimes it’s easier to swipe a card than shell out cash.
How Does a Charge Card Differ From a Prepaid Card?
A charge card has plenty of differences from a prepaid card. With a prepaid card, consumers must add money to the card and that money acts as the card’s spending limit. Prepaid cards can come in handy for those who do not have traditional checking accounts and need a place to store their money.
However, prepaid cards tend to come with fees. There may be an annual fee and a fee for replenishing the card with fresh cash. Plus, since the money added to a prepaid card is your own, there is no activity reported to the credit card bureaus. Using a prepaid card does not help build credit history or a credit score.
How Does a Charge Card Differ From A Balance Transfer Card?
A charge card is used for everyday purchases. With a balance transfer card, debt from a high interest credit card is transferred to the balance transfer card, which typically has a zero percent interest rate. The goal of a balance transfer card is to save money on interest payments.
A balance transfer card is not supposed to be used for traditional purchases like groceries, travel, gasoline or clothing. The zero percent interest rate does not apply to these kinds of purchases–only to the debt transferred onto the card. A balance transfer card is simply a tool to help consumers get out of credit card debt in a cost effective and time efficient way.