On the surface, a credit card and a charge card look and function the same way. In reality, charge cards have significant differences to traditional credit cards and those difference are significant, particularly if you are trying to control your spending and debt. Since the passage of the Credit Card Act, charge cards have grown in popularity, so we thought a review of charge cards vs. credit cards was in order.
Credit cards let you buy something for which you are billed later. You can carry your balance over from one month to the next, but you’ll pay interest on it and a minimum payment is required each month. Credit cards are issued by banks, retail stores and even oil companies. A Nilson Report that came out last month tallied the total number of credit cards in circulation at the end of 2009 at 576,400,000. It turns out that Chase, Citi and Bank of America make up the bulk of that monstrous number.
Charge cards also let you buy something for which you are billed later. But unlike credit cards, charge cards require you to pay the balance in full on the due date. Balances cannot be carried over from month-to-month, so there is no interest rate, APR, or minimum payment. Contrary to popular belief, charge cards extend far beyond American Express. Among the most popular, especially with small business owners, is the Chase Ink Bold. Annual fees are in the $100 range form most charge cards, and offerings include points for things like airline miles and concierge service to help with hotel and restaurant reservations.
American Express charge cards offers the largest and most varied selection of cards. One of which, known as the Centurion Card (or the black card), is by invitation only and has a $2,500 annual fee plus a one-time joining fee of $5,000. And what do you get for that small fortune? A personal shopper at Gucci and free companion airline tickets, for starters.
Both charge cards and credit cards have their advantages and disadvantages, but it really all comes back to debt.
Credit Card Pros and Cons
On the upside, if you are a timely payer and are not prone to going into debt, a credit card is a good option. It allows you to defer payment (at a price), maintain and/or improve your credit history, and rack up rewards on the cards that offer them. There is generally no annual fee associated with a credit card, and you get free purchase protection. Charge cards on the other hand will tell you their purchase protection is free, but it’s certainly built into the annual fee. Credit cards also have great introductory rates like 0% APR on Balance Transfers and Purchases for up to 15 months and some even give a flat cash back amount, just for signing up.
On the downside, credit card interest rates have been known to go up rather unexpectedly regardless of what kind of payment history you have. They also have been known to switch from a fixed to variable rate. The issuer will disclose the credit card terms ahead of time, but that’s not much consolation to a lot of us. A Pew Charitable Trusts study released this past Fall found that advertised rates on about 400 credit cards summer had jumped as much as 23 percent.
Similarly, your credit limit can go down. I remember when my trusted L.L. Bean-branded VISA credit card changed issuer hands (Bank of America purchased the entire portfolio at that time) and my credit limit went from $39,000 to $1,500. To add insult to injury, they pulled free shipping for online purchases from my list of coveted features!
More bad news surrounds credit card companies. This item from the Baltimore Sun: “Apparently, the closure of a card is not considered a material change in the terms,” explains John Ulzheimer, president of consumer education at Credit.com when discussing the possibility that a credit card issuer can cancel your card without notice. “I can’t believe I’m telling you this with a straight face,” he adds.
Some of these negatives will be cleaned up by the Credit Card Reform Act of 2009, but many of them will still shine a negative light on the credit card industry.
Charge Card Pros and Cons
Charge cards often come with no preset spending limit. If you need more financial discipline, a charge card is a great way to live within your means knowing you have to pay it all back at the end of the month. On the bright side, charge cards almost always come with deep point-based rewards programs, so every dollar you spend equals a certain number of points which can be banked to buy things like airline tickets or electronics.
However, unlike credit cards, if you fail to pay your charge card balance at the end of the pay period, your card will be suspended and you’ll be hit with major penalty fees. In addition, charge cards aren’t a great idea for small business owners whose income changes month to month. So if you rely on each month’s revenue to pay the bills for inventory purchases, you may want to go with a credit card. Another negative, as stated earlier, is that there are annual fees attached to most charge cards, but many waive it for the first year.
A Legal Perspective
The Fair Credit and Charge Card Disclosure Act and the Federal Reserve’s Truth in Lending regulation, commonly referred to as Regulation Z, treat both credit and charge cards pretty much the same. Issuers of both card types are mandated to disclose important information such as rates and fees in “a clear, easy-to-read and easy-to-compare manner so that consumers can shop for the terms that work best for them.” These are spelled out in the tissue papery brochures you receive along with your new card.
Truth in Lending is a very good thing. The Federal Reserve Bank of San Francisco explains, “Truth in Lending also requires card issuers to provide the information earlier than they had in the past. For example, if a card issuer calls and takes your card application over the telephone and there is a fee for the card issuance or availability, the card issuer must verbally give you the required information at that time.”
This table below specifically shows what must be disclosed.
|APR for purchases||X|
|How APR is determined||X|
|Method by which finance charge is calculated||X|
|Amount of minimum finance charge||X|
|Fees for purchases||X|
|Fees for cash advances, paying late and over your credit limit||X||X|
|When charges are due||X||X|
|Option to cancel the card due to renewal fees||X||X|
The Wall Street Journal reports that more and more people are using charge cards now a days. In fact, they account for 8% of all credit card offers. This seems purely symptomatic of people’s heightened awareness regarding debt. A charge card is one way to keep you honest about what you can afford and are especially appealing to students for that reason. However, most charge cards require above average credit, which is a rarity for anyone under the age of 25.
In addition, according to walletpop.com, the credit bureaus no longer use charge card balances in their calculations. So if you have a high balance, it won’t count against you. Using both kinds of cards (credit and charge) actually shows that you can manage and pay your accounts according to different rules. This, say some, can improve your credit rating.
Lest we not forget the last option left on the table, and that is to use neither. Many people find it easier to pay for an item in “the now” with cash, check or a debit card so they know they can pay for it. Credit and charge cards with high spending limits can give the false impression that one has more money than is actually in the bank, which can lead to mountains of future debt. If you do choose to use a credit or charge card, make sure you do so responsibly.