Credit Card vs Charge Card

american express logoCredit card have a closer cousin, Charge Cards. Charge cards are not very common. As I understand, only American Express offers charge cards in India. To add to the confusion, American Express offers credit cards too. With respect to the usage, there is little to differentiate between a credit card and a charge card. You get credit for your purchases and you must pay by the statement due date. If you have been spending responsibly and have been paying your dues in full on time, you would not notice any difference. I am sure many American Express customers won’t even realize whether they hold a charge card or a credit card. In this post, let’s explore the few yet important differences between credit cards and charge cards.

Charge Cards Don’t Have Any Pre-Set Spending Limit

Credit cards have credit limits. Your bank will usually provide you a credit limit that is 3-4 times your monthly income. You can’t spend more than your credit limit.  Or your card outstanding can’t exceed the credit limit at any point in time.

Charge cards have no such concept. I copy an excerpt from American Express Charge Cards MITC.

There is no preset spending limit on the Charge Card. “No PreSet Limit” does not mean spending is unlimited. American Express approves charges (spends done on Merchant Establishments in India or overseas) based on the declared financials, spending pattern, credit record and Account history. American Express reserves the absolute right to deny authorisation for any requested charge. The Cardmember can call up the helpline to understand the amount he may spend on the Card.

How Do You Check How Much You Can Spend on Your Charge Card?

In case of American Express, you can check your spending power when you log in to the card portal. You can enter the expected purchase amount and submit to check if the purchase for such an amount will be approved. Confusing, isn’t it? I am not sure if not having a preset spending limit is good or bad. One thing is sure though. If you are reckless, can’t control your spending urges and don’t manage your cashflows well, charge cards can be disastrous. On the other hand, if you manage your finances well, a charge with no preset limit (and potentially a higher one too) can provide you a lot of flexibility. In my opinion, charge card issuers would have relatively stringent eligibility criteria as compared to credit card issuers.

There Is No Concept of Minimum Payment Due in Charge Cards

In credit cards, you do not necessarily have to pay the bill amount in full. You can get away with paying the minimum amount due every month. Usually, minimum amount due is 5% of the outstanding bill amount. If you have signed up for credit card EMI, the EMIs are also added to the Minimum Amount Due.

Therefore, if your cashflows are stretched for any reason, you may find value in “Minimum Amount Due” feature. However, getting away with Minimum Amount Due has its own set of major drawbacks. You pay interest on the unpaid amount from the date of purchase. You lose the interest-free credit period facility. More importantly, Minimum Amount Due is only a stop-gap arrangement. If you can only make minimum payments on your credit card for more than a few months, you may have already taken your first steps towards a debt trap.

The only positive, apart from the payment flexibility, is that your account is reported as regular to the credit bureaus. A poor credit score can affect your ability to access credit in the future. Moreover, if you have a poor credit score, you may be asked to pay a higher rate of interest on your loans in the future. If you plan to take a loan or apply for a credit card in the near future, this is not a small positive though.

In case of Charge Cards, you must pay the outstanding amount in full. There is no such thing as the minimum payments. I copy the terms and conditions from the American Express Gold Card Terms & Conditions available on American Express website.

If we do not receive payment in full of the Charges shown on any monthly statement by the due date, Late Payment Charges will be levied at the rate of five percent (5%) on the unpaid balance. Subsequently, Late Payment Charges at the rate of 5% per month will be levied on any unpaid balances at the end of each interval of 30 days until payment is received in full. The minimum monthly Late Payment Charge shall be Rs. 300. Details of Late Payment Charges will be included in your monthly statement and unpaid Late Payment Charges will themselves be treated as overdue amounts and will be further subject to Late Payment Charges.

With respect to the charges, there is not much to differentiate. Credit card charges work in the similar manner. The only difference is that this American Express Card charges interest under the name of Late Payment Charges or delinquency fee. Credit Cards have explicit interest component, late payment fees etc. However, the impact is the same in both cases. You pay a very heavy interest for not settling the card amount in full. Late Payment Charge at 5% looks higher as compared to credit card (that charges between 3-4%). However, our sample set is very small. Moreover, credit cards have a host of other charges too for late payments (late payment fee etc). In this American Express card, everything seems to be built-in into a single charge.

An important point with charge cards is that, since the amount must be paid in full, you must pay the full amount to avoid adverse reporting to the credit bureaus.

Fees and Rewards

The sample set is very small for charge cards. Therefore, we can’t make generic statements. However, by looking at the statement of charges for American Express Credit Cards and Charge Cards, it appears that Charge cards have higher annual fees. For instance, American Express Platinum Charge Card has an annual fee of Rs 60,000 plus taxes. For the other charge cards, the annual fee is relatively low. If you spend well on your credit card/ charge card and have maintained a good credit history with the issuer, you can get the annual fee waived off or at least get a substantial discount on the annual fee.

On the rewards front, you should expect better offers/airport lounge access/rewards from charge cards if you are paying a heavy annual fee but that may not always be true. This entire field is very competitive.

What do you prefer? A credit card or a charge card?

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