Charge cards vs. credit cards; what are the differences?

• You can swipe, tap or insert a charge card to make everyday purchases and earn rewards, just like a credit card.
• Charge cards don’t have pre-set spending limits (which means they typically offer more buying power), unlike credit cards that do have hard credit limits.
• You must pay off a charge card in full every month, while you can carry a revolving balance on a regular credit card. Not paying off a charge card in full will result in stiff interest fees (above the standard credit card APR of 19.99%) and possible account closure.

In 2015, Chinese billionaire Liu Yiqian put in a winning bid for a famous painting by Italian expressionist Amedeo Modigliani. While it’s not uncommon for the uber-wealthy to buy expensive paintings, the transaction was a little out of the ordinary. He paid for the painting – a cool $170 million – with plastic, swiping his American Express Card. Liu collected hundreds upon millions in Membership Rewards points in the process, though the exact number of points he got is under wraps.

The idea that someone (even a billionaire) could make such a massive purchase without maxing out their credit card is mind-boggling. That is until you learn that Liu Yiqian used what’s called a charge card versus a credit card.

Below, we break down the differences between the two.

 

Charge cards vs. credit cards – explained

1. Credit cards have pre-set spending limits, while charge cards do not

• Credit cards

When applying for a credit card, you’ll be assigned a hard credit limit. Your credit limit is the maximum balance you can rack up on your credit card – or simply put, the most you can spend on the card.

If you attempt to go over your credit limit, your credit card will be declined and the purchase won’t go through. In some cases, you’ll also be charged an additional over-limit fee and face a ding to your credit score. Credit card limits aren’t flexible, and to spend beyond your assigned limit, you’ll first have to submit a request for a credit limit increase from your bank and undergo a credit check (though banks will sometimes pre-authorize a credit limit increase). Credit card limit changes aren’t instant or guaranteed, and aren’t meant to be made haphazardly just to give you the ability to make a large one-off purchase.

• Charge cards

Charge cards don’t come with pre-set spending limits. Charge card providers, like American Express, allow cardholders to spend whatever they think users can afford to pay off each month based on their payment history and reported annual income.

Needless to say, charge cards offer greater flexibility and buying power than a credit card, especially when making larger purchases. In fact, charge card providers often accommodate special requests from seasoned cardholders by increasing their purchasing power as needed. It’s one of the key reasons why charge cards are popular with big spenders and the wealthy.

That said, having no official pre-set limit doesn’t equate to unlimited spending. Depending on a person’s financials and card usage, charge cards can have spending caps and may require authorization for bigger purchases. You’ll usually have to build a good rapport by consistently paying off your charge card in full for a few months before you can take advantage of its higher spending ability. American Express, the sole issuer of charge cards in Canada, offers an online tool called “Check Spending Power” that instantly informs cardholders whether they can cover a purchase on their charge card after keying in its estimated price.

2. You can carry a balance on a credit card, but must always pay off a charge card in full

• Credit cards

With a credit card, you’re not required to pay off your statement owing in full and you can carry a balance from one month to the next.

While you’ll owe interest on the amount you carry over (usually based on a 19.99% annual interest rate), you can avoid paying additional late fees provided you pay the required monthly minimum on time. Not to mention, if you use a low interest credit card, you can carry a balance and pay far less in interest.

You can completely avoid credit card interest charges as long as you pay off your balance in full every month, which is why it’s always recommended. But, the flexibility to pay off a balance over time can help those who need to space out their payments and pay back what they owe gradually in smaller increments.

• Charge cards

Charge cards must be paid off in full every single month. If you don’t pay 100% of the balance on a charge card, you’ll face stiff penalties. Your account may be considered delinquent and you’ll get hit with exorbitant interest charges of upwards of 30.99% – which is over half the interest rate of most credit cards. Charge card accounts may even be closed in cases when balances are consistently carried over.

3. Credit cards come in all types, while charge cards are usually premium travel cards

There are numerous types of credit cards out there for almost every financial need and spending personality – from travel credit cards and cash back cards to low-interest cards, no fee cards, and even student credit cards for those just starting to build their credit.

Charge cards are far less diverse. Most of the charge cards available in Canada are travel cards that offer rewards in the form of either points or miles that are geared toward travel redemptions like free flights and hotel stays. Plus, most charge cards are on the premium end, with upgraded perks like free hotel upgrades and big sign-up bonuses, along with annual fees that hover between $120 to upwards of $699.

4. Between the two, credit cards are far more common

Credit cards are more ubiquitous than charge cards and are issued by all three major card companies: Visa, Mastercard, and American Express. In fact, all of Canada’s banks and credit unions only issue credit cards.

Charge cards are much rarer and, in Canada, are only offered by American Express. As mentioned above, American Express also issues its own credit cards and while many assume all American Express Cards are charge cards, that’s not the case.

5. Cash advances and balance transfers

While you can take out a cash advance and consolidate your debts through a balance transfer with a credit card, you generally can’t do either with a charge card. The reason why boils down to the fact that while a credit card can be an option for borrowing money and managing debt (albeit an expensive one), a charge card isn’t built for that purpose.

6. Their business models

While it may not affect you as an everyday cardholder, it’s worth noting that the way banks and card companies make money does differ slightly for credit cards versus charge cards.

For credit cards, most of the money made by banks is through interest charged to cardholders who don’t pay off their balance in full. Without going into too much detail about how credit card interest works, you’ll owe 19.99% in interest annually on any credit card balance you don’t pay off in full (or the equivalent of 0.05% in interest every day). Remember, as a cardholder, you can completely avoid interest charges on your credit card as long as you pay off your statement in full each month (which is why it’s so important to do so). The other major way card companies make a profit off credit cards is through merchant fees, whereby retailers have to pay a small percentage of every sale that they made using a card back as a fee.

The profits earned from charge cards, on the other hand, are less focussed on interest payment since charge cardholders are required to pay off their balance in full every month. Profits from charge cards are mostly from merchant fees and annual fees. In fact, American Express, the biggest issuer of charge cards, is known to charge retailers steeper merchant fees. It’s one of the main reason why some stores don’t accept American Express as a payment option.

Both credit cards and charge cards generate revenue for banks and card companies through a handful of other fees including foreign transaction fees, delinquency fees, balance transfer fees, and more.