What is a charge card?


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A charge card is like a credit card except there is no minimum payment and you won’t be charged interest. That’s because you’re expected to pay the balance in full every month.

A credit card works differently in that you can carry a balance and pay only a portion of what you owe, but in return you pay interest on the unpaid amount. If you occasionally carry a balance, you should consider a low-interest credit card over a charge card.

Who issues charge cards?

The idea for a card that could be used at different merchants in lieu of cash was hatched in 1949 by businessman Frank McNamara, who took his wife out to dinner in New York — and left his wallet at home, leaving her to foot the bill. Embarrassed, McNamara set out to create what later became known as the Diners Club card.

With partner Ralph Schneider, the two men grew the Diners Club into a 10,000-member network that was accepted at dozens of restaurants and two hotels. The card earned its makers money by charging its users a $3 annual membership fee and merchants a percentage of the purchase price — a model that’s strikingly similar to how charge and credit cards work today.

The rapid popularity of the Diners Club card led to other financial organizations following in their footsteps, including the best known charge card on the market today: American Express.

Although American Express today offers both charge and credit cards, the company is still best known for its charge cards. It issued its first charge card in 1958; within five years, more than 1 million cards were in circulation.

Fees associated with charge cards

Since charge card holders are expected to pay their balance in full every month, card issuers can’t rely on interest charges to make a profit. Instead, charge card issuers earn revenue through:

  • Annual fees. The fees for charge cards vary by issuer. However, since the launch of the American Express Platinum in 1984 and its jaw-dropping-for-the-time annual fee of $250, in general the higher the fee the more prestige a card is perceived to have. For example, the American Express Centurion card, aka the “black card,” has an initiation fee of $7,500 and an annual fee of $2,500. The card is considered by many to be the ultimate status symbol and has been immortalized in rap songs and video games.
  • Late fees. If you don’t pay your bill in full each month, you’ll be charged a late fee. The CARD Act caps fees at $27 for the first late payment and $38 for subsequent late payments. In some cases, an issuer may revoke privileges or freeze your account if there are too many late payments. Credit cards, on the other hand, tend to allow longer periods of late payments.
  • Merchant fees. These are the fees that a merchant pays to the card issuer and are typically a percentage of each transaction plus a flat fee. The merchant fees themselves are used to pay banks for handling the transaction between the customer and the card, for checkout terminal rentals where the cards are swiped or scanned, for fraud costs and potentially dozens of other charges depending on the specific card or merchant.

How charge cards can affect your credit score

Charge cards also differ from credit cards in that they don’t have any pre-set spending limits. This also means the amount you owe on your charge card will mostly likely not impact your credit utilization ratio, a measurement of how much credit you use in relation to how much has been extended to you.

A high ratio on a credit card — say, owing $20,000 on a card with a $25,000 limit — can adversely impact your FICO score. But with a charge card, since there technically isn’t a limit, there is no ratio. Keep in mind that other aspects of owning a charge card will affect your credit, including the credit check an issuer conducts before approving you for a card or a history of late payments.