One of the biggest misconceptions people have when opening new cards is assuming that all cards are credit cards… that is certainly not the case! Two of the cards that I use most often are actually charge cards, which means they must be paid off in full every month. Unlike credit cards, these cards do not allow you to have a balance at the end of the month, which also helps you manage your budget… It is pretty hard to go into credit card debt if you can’t carry a balance!
What is a credit card?
Credit cards are the most common card outside of your debit card…. which you shouldn’t be using anyways! Credit cards are issued from many companies, banks, and even retail stores with the hopes that you will carry a balance… allowing them to generate additional revenue from interest. For example, American Express generated approximately 10 million dollars in 2020 in interest revenue alone… That is a lot of revolving credit card interest! Remember, credit card issuers would much rather push you into a credit product with no annual fee over their charge cards that carry $200+ annual fees due to the ability to generate revenue from the interest charges.
What is a charge card?
Charge cards are typically limited to individuals with good or great credit scores. The most prominent example of charge cards are the American Express Platinum and the American Express Gold. Both of these cards provide tremendous value in points and benefits, however they also must be paid off in full at the end of every month and typically come with high annual fees, $295 for the American Express Gold and $550 for the American Express Platinum.
What is the difference between the two?
Charge cards are different from credit cards in the way they are reported to the credit bureaus, spending limits, and the line of credit it is. In general, charge cards are reported to the credit bureaus without a utilization percentage because they do not have a spending limit. Not having a utilization percentage allows you to avoid one of the biggest “dings” on your credit score, high utilization. Charge cards also do not typically have spending limits because they have to be paid in full monthly. The caveat to this is the new American Express “Plan It” option that allows you to pay for large purchases over a few months, although they charge between 16-20% premium… AKA interest! The line of credit that is generated from charge cards is also an open line of credit as opposed to a revolving line of credit like you have on credit cards. Credit card lines of credit are revolving because they have utilization and once you hit your limit you cannot spend more unless you request an increase. In general, it is a good idea for your credit portfolio to have a mix of charge and credit cards.
I personally deal mostly in charge cards as I have found they provide greater value and benefits than your typical credit card. What are your thoughts? Did you know there was a difference between the two? Leave a comment below!
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