What if you had a financial tool that helped cover your daily business expenses and stay on budget?
Now, what if we told you it already exists?
Although they share similarities with business credit cards, charge cards are often better for entrepreneurs and small business owners interested in saving money for their business. But perhaps because of their similarities, it’s also easy for people to confuse the two.
So, what is the difference between charge card vs. credit card? And how are charge cards different from their credit card counterparts, and what makes them so useful for businesses? Let’s take a look.
What is a charge card?
A charge card is used for making purchases on credit, with the cardholder expected to pay off the entire balance at the end of the account’s billing cycle. Billing cycles are typically 30 days. Because you’re required to pay the card in full each month, a charge card encourages greater awareness of how and where your business is spending money.
These products work well for building up your business credit history, covering day-to-day and recurring business expenses. And they can be helpful for managing employee spend (just make sure to follow these corporate credit card policy best practices to protect your bottom line). Additionally, charge cards are great options for small businesses that don’t need to finance themselves with credit, which tends to be extremely expensive.
The not-so-good news? Unfortunately, charge cards aren’t as common as they used to be, so you’ll have fewer options to choose from if you go this route.
What is a credit card?
Credit cards enable cardholders to pay for goods and services with credit issued by providers like Chase or Capital One. This means that, instead of directly using existing cash for each purchase, the charge is issued as a loan and noted in a monthly credit card statement. The loan amount—here known as the credit card balance—is paid back in monthly installments plus interest to the credit card company. Credit cards also have a credit limit, or an amount that cardholders can borrow up to or charge in a billing cycle. If you hit the credit limit, you have to pay down some of the money you owe to be able to make more charges.
Business credit cards are best used for larger business investments, such as purchasing equipment or other assets, thanks to their flexible payment terms.
If you’re having trouble choosing between charge cards and credit cards for your business, we’ll break down the key differences and similarities between these types of cards below.
Charge card vs. credit card: How are they similar?
Can boost credit score
Your payment history makes up 35% of your credit score. And even one missed payment on a charge card or credit card can negatively affect your credit report. But by staying in good standing with your provider and making regular payments on your card, you can easily improve your credit score over time.
That’s why financial responsibility and timely payments are key. To limit overspending with your card make sure to keep track of your monthly budget. Keep in mind that because charge cards must be paid off in full each month, the money charged to them does not factor into the credit utilization part of your credit score.
Offers perks and discounts
Credit cards and charge cards come with similar benefits, such as:
- Cash back
- Rewards points
- Travel miles
- Vendor discounts
In the past, charge cards were well-known for the abundant perks they offered. But due to fierce competition between credit card issuers, some of their offerings—particularly business travel credit cards—now boast benefits that rival those of charge cards.
When determining which card is right for you, consider how these benefits will fit your company, and which would be the most lucrative based on your spending habits.
Can incur late payment fees
Both credit cards and charge cards impose late fees for overdue payments. Credit cards give you the opportunity to bypass these fees by making minimum payments on the balance. But keep in mind that you will accrue interest on the unpaid balance each month, which can add up.
With charge cards, however, you’re required to pay the entire balance by the due date if you want to avoid these fees. If you fail to do so, card providers may levy additional penalties on top of that, including fines and even suspension or closure of your account.
Charge card vs. credit card: How are they different?
Comes with different fees
Credit cards and charge cards have different standards for things like interest fees, annual fees, late fees and more.
Credit cards also typically carry higher interest rates than other types of business financing. Paying interest charges on your credit balance can add up to a large sum over time, and can even put you into credit card debt if you don’t pay your full balance. In comparison, charge cards generally don’t come with any interest fees at all. This is because cardholders are responsible for paying the entire balance at the end of each billing cycle.
And while it’s easy to find credit cards with low annual or monthly fees (or no fees at all), you’ll be hard-pressed to find many charge cards that offer the same. American Express charge cards, for example, come with high annual fees that start at $150—and go as high as $695.
Has different eligibility requirements
With most financial products, your credit history will be one of the biggest eligibility factors. Other factors like time in business, other debt you have, and whether your business is in good standing can also impact your eligibility. Credit cards and charge cards are no exception.
Business credit card requirements vary by lender, but they are generally more lenient than charge card issuers. Credit cards with the lowest APR and the highest spending limits are typically reserved for borrowers with excellent credit. But those with bad credit may still be eligible for a credit card, the terms might be less desirable though. This makes credit cards accessible to most businesses, no matter their financial situation.
Comparatively, charge cards typically have a more strict set of conditions for potential applicants to meet. You’ll need at least a good credit score, of 670 or higher, to qualify for most charge cards. And because charge cards require full repayment each month, issuers want to be certain that cardholders will be able to consistently follow through with their payments.
Uses different card limits
Credit cards come with preset spending limits, which essentially put a cap on the amount of credit available to you each month. Once you reach your limit, you’re automatically restricted from making any new purchases on the account. Once you pay down some of that debt, then your credit increases again.
When you’re approved for a card, the issuer determines your credit limit based on your credit score and payment history. Changes to this number are few and far between, and done at your provider’s discretion. Some credit card companies will allow you to request an increase in your credit limit though.
Meanwhile, charge cards don’t have preset spending limits the way that credit cards do. The 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 especially useful for companies with consistent cash flow, or for those expecting to make many purchases in a short time span.
Offers different payment terms
Although charge cards offer more flexible spending limits across the board, credit cards tend to have more flexible payment terms.
No matter how much you spend with your credit card during a given billing cycle, you’re only required to make the minimum monthly payment on your total balance. This amount may represent a mere fraction of the outstanding balance for each billing cycle. Any unpaid balance that’s rolled over to the next month is charged according to your interest rate. That interest rate is essentially the cost of borrowing money, which is what you do when you use a credit card to make purchases.
Be warned, though: This feature makes it deceptively easy for cardholders to rack up debt on their account. If this cycle is perpetuated over a long period of time, your business can accrue exorbitant interest on that balance and potentially lower its credit score in the process.
In contrast, charge cards require you to pay the entire balance in full every month. Businesses with consistent cash flow that can shoulder the full expense may find this option to be a highly effective way to manage their budgets.
Impacts credit score differently
Credit utilization refers to how much of your available credit is used at any given time, and is expressed as a percentage. This factor accounts for a weighty 30% of your FICO credit score.
Since credit cards come with a spending limit, how much of that credit you use compared to your total available credit will impact your profile. Keeping your credit utilization down can help improve your credit score. It signals to creditors and credit bureaus that you can use your card, and pay it off, in a responsible manner. Conversely, a higher credit utilization ratio brings your credit score down.
Charge cards generally don’t come with spending limits, credit agencies don’t factor charge card credit utilization rates in their scoring models. Meaning that making larger purchases with these cards rather than with credit cards can help improve your credit and increase your spending power. However, you can still expect charge card use to impact other aspects of your profile, such as your payment history and the length of your credit history.
Ramp’s charge card takes the complexity out of corporate finance
Despite the more stringent eligibility requirements, charge cards are appealing for many small business owners and entrepreneurs due to the competitive benefits and added savings they can offer.
In fact, a report from Mercator Advisory Group found that small business charge card usage increased from 23% to 31% in 2020. Perhaps as a way for these organizations to save on expenses and reduce their revolving credit during the COVID-19 pandemic.
However, traditional corporate cards often require business owners (or the businesses themselves) to have solid credit histories. Something that may not be feasible for new owners and entrepreneurs just starting out.
That’s where Ramp comes in. We offer corporate cards with no credit checks or personal guarantees, plus unlimited 1.5% cash back on all purchases. In addition to the physical cards you’re accustomed to, you can easily set up virtual corporate cards for you and your employees too.
Thanks to their virtual nature, these credit cards eliminate the chance of a physical card being lost or stolen. And although virtual cards for businesses don’t completely eliminate the possibility of fraud, they mitigate the chances. For one, the cards can’t be physically stolen. In addition, spending caps and limits reduce the potential damage in case of a fraud incident.
Combined with our powerful spend management platform, the Ramp corporate card doesn’t just pay for and track business expenses. It offers the option for you to monitor and even control employee spend too.
With Ramp’s spend management solutions in your finance stack, you’re better equipped to identify savings opportunities and reach your financial goals that much sooner.
Get in touch with one of our experts today to find out how.
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