While the term "credit card" is often used to describe all card purchases made on credit, another type of card is known as a "charge card." There is one major distinction in how they operate — a charge card's outstanding balance must be paid in full at the end of each month. Credit card balances, on the other hand, can be paid on monthly installment plans that can run for many years if the consumer chooses not to pay off the full balance in a lump sum. There are some other important differences between the two types of cards, which could be favorable to some consumers and a problem for others, depending on how they intend to use consumer credit.
Unlike credit cards that charge consumers a stated annual percentage rate for any unpaid balances, charge cards have no interest rate attached to them because cardholders are required to pay the balance in full each month. Charge cards will, however, levy a hefty late fee for any balance that isn't paid in full by the due date. Charge card companies always bill cardholders an annual fee as a way to offset the revenue it does not receive from interest on unpaid balances. On the other hand, credit card companies collect so much money from interest, they often do not charge customers an annual fee to carry the card.
Credit utilization is a big factor in calculating credit scores because it considers how much of a person's available credit limit is being used. A high utilization percentage on a credit card is considered bad, because the person is close to being maxed out. But charge cards are a different story. Many of the most popular credit scoring companies, such as FICO and Vantage Score, do not use charge card balances when calculating consumer credit scores. Charge cards usually have no credit limit.
Balance transfers and cash advances
Credit card companies are famous for offering consumers opportunities to transfer balances from one card to another card that offers a lower interest rate. You won't see those offers coming from charge card companies. For the most part, charge cards do not allow balance transfers. While cash advances also are common with credit cards, charge card companies will not give you a cash advance.
Only consumers with the best credit are offered charge cards. Charge card companies try to screen their customers for those who are best able to pay off credit balances each month. Individuals who use charge cards have a better chance of sticking to a budget than those who use make installment payments on credit cards and carry credit card balances.
Tim Grant has been a journalist since 1989 and has worked for several daily newspapers, including the Charleston "Post & Courier," the "Savannah News-Press," the "Spartanburg Herald-Journal," the "St. Petersburg Times" and the "Pittsburgh Post-Gazette." He has covered a variety of subjects and beats, including crime, government, education, religion and business. He graduated from The Citadel with a Bachelor of Science in business administration.