credit cards

Is a charge card better than a credit card?

Credit cards
Highlights
  • To avoid a late-payment fee, a charge card must be paid in full every month.
  • Charge card rewards can surpass those of credit card points and miles.
  • It's generally easier for consumers to get a credit card than a charge card.

Some consumers may like the convenience and rewards of using a credit card -- but don't want to revolve debt from month to month. If you fit that description, consider another payment choice: the charge card.

A charge card is a good option for some plastic users, says John Ulzheimer, president of consumer education at SmartCredit.com.

The downside -- or another upside, depending on one's point of view -- is that the card must be paid off in full every month to avoid a late-payment fee, Ulzheimer says.

"At the end of the month, you have to write, in some cases, a really big check. And you don't have a whole lot of options when it comes to prolonging your payback of the balance," he says. "It's a built-in debt-prevention tool within the card."

Charge card or credit card?

The terms "charge card" and "credit card" are often used interchangeably, but the two payment options aren't identical. Here's why.

  • Spending limit: A charge card has no preset spending limit, but that doesn't mean spending is unlimited, says Desiree Fish, a spokeswoman for American Express. Instead, the limit is dynamic and adjusted to reflect the customer's perceived spending capacity.
  • Interest: A charge card must be paid in full each month, so no interest is charged.
  • Late fee: In lieu of interest, an unpaid charge card balance incurs a late-payment fee that's comparable to a bank overdraft charge. The late fee for an American Express charge card is $35. Fish says some customers are allowed certain "flexible payment options" that include occasionally revolving debt at competitive interest rates; however, these privileges are highly restricted.
  • Annual fee: A charge card typically has an annual fee that can be modest or substantial. The familiar entry-level American Express Green Card costs $95 per year while the top-of-the-line American Express Centurion card, nicknamed the "Black Card," has an annual fee of $2,500.
  • Rewards: Charge cards offer rewards that can surpass a typical credit card's points or airline miles program. Examples of these rewards include travel insurance, lost-baggage protection, warranty protection, points tradable for merchandise or cash, travel benefits (such as hotel room upgrades, free golf or spa services) and advanced ticket sales and premium seating at entertainment venues.

Whether the benefits are worth the fees depends on the consumer's spending and travel habits, Ulzheimer says.

"You should look at the fee and what you're getting for the fee. Having an AmEx Platinum card at $450 a year is probably not the best slice of plastic for everyday usage. But if you find yourself at the airport once or twice a week, you're going to start enjoying the benefits and it seems to be worth it," he says.

Credit reporting

Charge card payment histories are reported to the credit bureaus, Fish says. And using one can help a consumer's credit score, according to MyFICO.com, a consumer information website.

Exactly how a charge card affects a credit score is more complicated, however.

Ulzheimer says older credit scoring models, still in use, interpret the charge card's highest balance in its history as if it were a credit limit. That means a card that once had a high balance, but usually has a lower balance, could improve the credit score's debt utilization component. A card that hits near its highest balance month after month could have a negative effect.

Newer credit scoring models consider a charge card as part of the credit score's payment performance component, but not its utilization component. That's because a highest-ever balance isn't really the same as a credit limit.

Who offers these cards

American Express is the dominant issuer of charge cards. In fact, Ulzheimer says, virtually no one else offers this type of product for consumers. Some issuers, such as Chase, offer small-business charge cards. Department stores and gas stations used to issue them as well, but today most retailers' plastic is a co-branded Visa or MasterCard credit card.

The application process to get a charge card is similar to that required to obtain a credit card, Fish explains. However, Ulzheimer says it's easier for most consumers to get a credit card from a major issuer than to get any type of American Express card.

Indeed, not everyone is a candidate for this kind of card. Fish says American Express doesn't disclose its minimum credit criteria, but she says the company looks for "credit-quality customers" who have the ability to spend large sums.

"For anybody who has a lot of marks on their credit -- bad behavior, bankruptcy -- it's going to be really hard to get an American Express card," she says, "if not impossible."

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