Charge card vs. credit card: Key differences
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Charge cards and credit cards are both forms of cashless payments, but the way you pay them off is different. While credit cards allow you to carry a balance, charge cards must be paid in full every month.
Aside from how payment works, there are a few other differences you should know. In this article, we'll explain how charge cards and credit cards work so you can choose the right card for your business needs.
What is a charge card?
A charge card is a type of payment card that allows cardholders to make purchases with the requirement to pay off the balance in full at the end of each billing cycle. Unlike a credit card, a charge card does not have a preset spending limit, but the issuer may still restrict spending based on the cardholder's creditworthiness and spending history. Since there is no option to carry a balance, charge cards do not incur interest charges, though they can have high late fees and penalties.
Charge cards often come with high annual fees but offer extensive rewards and benefits, such as points, cashback, or travel perks. They are popular among those who prefer premium services, with American Express being a well-known issuer. The lack of a preset spending limit and the requirement to pay the balance in full make them ideal for disciplined spenders who want to maximize rewards without incurring interest.
How does a charge card work?
A charge card is similar to a business credit card, except that it needs to be paid in full every month. There’s no option to make a minimum payment and carry your balance to the next month with interest, which some might consider to be a disadvantage.
In addition, charge cards come with expense management software and custom controls to help manage employee spending. You can add rules like merchant restrictions and preset spending limits to enforce your company’s expense policy.
What is a credit card?
A credit card allows users to borrow funds from the issuing bank up to a predetermined credit limit to make purchases or withdraw cash advances.
Credit cards also come with various features and rewards, such as cashback, points, or travel benefits, which incentivize spending. Some offer introductory 0% APR periods on purchases or balance transfers, making them useful for financing larger purchases or consolidating debt. Unlike charge cards, credit cards typically have lower or no annual fees, making them more accessible. However, carrying a balance can lead to significant interest charges, making responsible use crucial for avoiding debt.
How do credit cards work?
Unlike charge cards, credit cards offer the flexibility to carry a balance from month to month. If the full balance is not paid off by the due date, interest is charged on the remaining amount, typically at high annual percentage rates (APRs). Credit cards have set credit limits based on the cardholder's creditworthiness, and going over this limit can result in additional fees or declined transactions.
Charge cards vs. credit cards at a glance
Here's a quick overview of the differences between charge cards and credit cards:
4 key differences between charge cards and credit cards
Now let's take a closer look at the key differences between charge cards vs. credit cards that you should keep in mind.
1. Payment terms
Charge cards offer flexible spending limits, but credit cards provide more flexible payment terms. With a credit card, you only need to make the minimum monthly payment by the due date, even if it’s just a small portion of your total balance. However, any unpaid balance is carried over to the next month and incurs interest charges based on your card’s rate.
This flexibility can make it easy to accumulate debt over time, potentially leading to high interest costs and a negative impact on your credit score. In contrast, charge cards require you to pay the full balance each month, avoiding interest and late fees. For businesses with stable cash flow, this can be an effective way to manage expenses and avoid debt.
2. Spending limits
Credit cards cap the amount of credit available to cardholders each month. Once you reach your credit limit, you’re automatically restricted from making new purchases on the account. Once you pay down some of that debt, then your available credit increases again.
When you’re approved for a card, the issuer determines your credit limit based on your credit score and payment history. If you'd like to raise your limit, you'll have to demonstrate a history of responsible and frequent card use.
Charge cards, on the other hand, don’t have preset card limits. Their spending limit fluctuates (sometimes even monthly) based on factors like:
- Credit history
- Monthly spending
- Liquid assets
- Historical sales
- Repayment habits
These flexible limits make charge cards useful for large purchases or multiple purchases in a short timeframe.
3. Eligibility requirements
Credit card issuers determine your eligibility based on your credit history. If you have a bad credit score, you'll still qualify for some cards, but they'll usually come with higher interest rates. Having a good to excellent credit score allows you to access the best business credit cards.
Charge cards, on the other hand, evaluate your application based on your company's financial situation. Most providers consider your annual revenue and amount of capital in the bank. So, if you don't have an established business credit history, you can still qualify—as long as your business is bringing in enough profit.
4. Impact on credit score
Credit utilization refers to how much of your available credit you’re using at any given time, expressed as a percentage. Since credit cards come with a preset limit, how much of that credit you use compared to your total available credit will impact your profile. In fact, this factor accounts for a weighty 30% of your FICO credit score.
Keeping your credit utilization low can help improve your credit score. It signals to creditors and credit bureaus that you can use your business credit card—and pay it off—responsibly. Conversely, a higher credit utilization ratio will negatively impact your credit report.
Charge cards generally don’t come with preset limits, so credit agencies don’t factor credit utilization rates into their scoring models. Because of this, making larger purchases with a charge card instead of a credit card can help improve your credit score instead of harming it.
Should I get a charge card or a credit card?
If your business makes steady money every month, a charge card could work well since it requires paying off the full balance monthly. This can help keep spending in check. On the other hand, if money comes in more sporadically, a credit card might be better since you can carry a balance from month to month, providing some financial flexibility during tighter times.
Expense management is another factor to consider. Charge cards often come with tools that help track and control spending, making it easier to manage business expenses. Credit cards may also have expense management features, but they might not be as comprehensive. The right card can provide valuable insights into your spending, helping to streamline budgeting and financial planning for a small business.
Best charge cards for businesses
If you think a charge card is right for your business, you have plenty of options. Here are our top picks for business charge card issuers:
Do charge cards help your business build credit?
Yes, charge cards can help build credit, just like credit cards. When you use a charge card responsibly—making purchases and paying off the full balance on time each month—this positive payment history is reported to the credit bureaus. Consistent on-time payments contribute to a strong credit score, as payment history is a major factor in credit scoring models.
However, since charge cards do not have a preset spending limit, they don't impact the credit utilization ratio, which is the amount of credit used compared to the total available credit. This ratio is an important factor in credit scoring for traditional credit cards. While charge cards won't directly influence this aspect, they still positively impact your overall credit profile through timely payments and responsible account management.
Can you switch from a charge card to a credit card?
It is possible to switch from a charge card to a credit card, but the process depends on the issuer's policies. For example, American Express allows cardholders to request a "product change" to switch from a charge card to one of their credit card options. This process usually doesn’t require a new application, and your account history is typically preserved, which can benefit your credit score.
If a direct switch isn’t available, you may need to apply for a new credit card and then close the charge card if desired. However, closing an older account can impact your credit history and utilization ratio, potentially affecting your credit score. It’s best to check with your issuer for specific details and consider the potential credit impact before making the switch.
What are the disadvantages of a charge card?
Charge cards have several disadvantages that may not make them suitable for everyone:
- Mandatory full payment: Charge cards require the entire balance to be paid off each month, which can be challenging if you experience unexpected expenses or cash flow issues. Unlike credit cards, there’s no option to carry a balance, which limits flexibility in managing finances.
- High fees and penalties: Charge cards often come with high annual fees, especially for premium cards that offer extensive rewards and benefits. Additionally, if you miss a payment, late fees can be substantial, and continued non-payment may result in account suspension or cancellation.
- Limited acceptance: While charge cards are widely accepted, they are not as universally accepted as Visa or Mastercard credit cards. This could be an issue when traveling or in certain locations where acceptance is limited.
- No impact on credit utilization: Since charge cards don't have a preset spending limit, they do not affect your credit utilization ratio, an important factor in credit scoring. This could mean fewer opportunities to improve your credit score through low utilization.
Ramp’s charge card takes the complexity out of corporate finance
At Ramp, we offer corporate charge cards with no credit check, no personal guarantee, and cashback on purchases. In addition to physical cards, you can also spin up an unlimited number of virtual corporate cards for you and your employees.
Combined with our powerful expense management platform, Ramp cards track and report your business expenses while identifying savings opportunities. To qualify for Ramp, all you need is:
- A registered LLC or corporation in the US
- An Employer Identification Number
- $25,000 or more in a U.S. business bank account—or, commerce businesses may be eligible for our sales-based underwriting
- Personal contact details as the business owner
FAQs
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- Corporate card with customizable spending controls
- Cashback rewards on purchases
- Unlimited free physical and virtual employee cards
- Must have $50,000 in a business bank account to qualify
- Balance must be paid in full each month
- Advanced expense management automations and accounting integrations
- No personal guarantee or credit check required for eligibility
- No annual fee or foreign transaction fees
- Must be a corporation, limited liability company, or LP to qualify
- Must have most of your operations and corporate spend in the US (though international purchases are supported with no foreign transaction fees)
- Business credit card with the option to pay in full or carry a balance, with different APR rates for each option
- Points-based membership rewards
- Employee cards available for $50 each
- Requires a good to excellent credit score to qualify
- Welcome bonus of 70,000 points if you spend $5000
- Flexible payment options
- Up to 55 days with no interest
- High annual fee
- Default 30% APR rate
- No airport lounge access or travel emergency medical coverage
- Charge card with customizable spending controls
- 2% cashback rewards on purchases
- Unlimited free physical and virtual employee cards
- Balance is due each month with a minimum payment requirement
- Requires a good to excellent credit score to qualify
- Welcome bonus of $3000 if you spend $100,000 in the first 6 months
- Rewards don’t expire
- No foreign transaction fees
- High annual fee
- 2.99% late payment fees
- Offers fewer expense management features than some cards