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Charge Card vs Credit Card


Photo Credit: pexels.com Rutpratheep Nilpechr

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If you are old enough, you may remember the Diners Club brand.
Diners Club introduced charge cards before American Express introduced charge cards.
However, now the Diners Club brand is all but forgotten in the United States.
When people think of charge cards today they often think of American Express.
American Express currently offers both its traditional charge cards and also credit cards.
Credit cards are also issued by full service banks, credit unions, and companies such Capitol One and Discover which are focused more purely on credit cards.

Revolving Loan Versus Installment Loan

Both credit cards and charges cards are revolving lines of credit.
You spend a given amount, pay it back, and you are then free to repeat the pattern until either you or the issuer closes the account or the issuer suspends your spending ability.
This is in contrast to an installment loan such as a car loan.
If you pay extra principal towards your car loan in addition to your scheduled monthly payment, you cannot later request that extra principal back at some future date.

No Preset Spending Limit

American Express charge cards are known for the language: No Preset Spending Limit.
"No Preset Spending Limit" does NOT mean unlimited spending power.

Minimum Payment

The American Express website has the text below as part of its description of minimum payments:
"Different card issuers calculate minimum payments slightly differently, but it’s generally between 1-to-3% of your statement balance or a standard minimum, whichever is more. For example, one of my cards charges 1% of the statement balance but not less than $35 unless the full balance is less than that, in which case the minimum payment would be the full balance. If I carry a balance from one month to the next, the minimum payment is calculated slightly differently: it’s 1% of my balance plus any interest that was charged in the previous month."

Simplifying Assumptions

The table below is intended to explain the difference between a charge card and a credit card using what had been for many years the standard definition of a charge card.
American Express has been adding credit card type payment options to its charge cards over the last several years, but I am going to put that aside in order to explain the simplest cases.
In addition, to keep the explanation simple, I am going to assume that:

In real life, the formula for calculating the minimum payment due amount will be more complicated than what is shown in the table below and it is unlikely that your statements will always line up on calendar months.
Depending on your background and learning style your reaction may be either:


Product TypeCharge CardCredit Card
Spending LimitNPSL$4000
Statement Begin Date ⇾September 1September 1
Post Date ↴Amount Posted ↴Amount Posted ↴
September 7$750$750
September 15$300$300
September 23$600$600
Statement End Date ⇾September 30September 30
September
Statement Produced
Minimum
Payment Due
October 25th
September 07 $750
September 15 $300
September 23 $600
===============
Total $1650
September 07 $750
September 15 $300
September 23 $600
===============
Total $1650 * 2% = $33
Statement Begin Date ⇾October 1October 1
Post Date ↴Amount Posted ↴Amount Posted ↴
October 4th$250$250
October 7th$350$350
Statement End Date ⇾October 31October 31
October
Statement Produced
Minimum
Payment Due
November 25th




October 04 $250
October 07 $350
===============
Total $600
September 07 $750
September 15 $300
September 23 $600
October 04 $250
October 07 $350
===============
Total $2250 * 2% = $45
Statement Begin Date ⇾November 1November 1
NovemberNo purchasesNo purchases
Statement End Date ⇾November 30November 30
November
Statement Produced
Minimum
Payment Due
December 25th


No Balance
No Payment
Required


September 07 $750
September 15 $300
September 23 $600
October 04 $250
October 07 $350
===============
Total $2250 * 2% = $45

Balance Chasing

If a pattern of ever increasing balances occurs indefinitely without ever getting paid down, at some point a credit card issuer may start "balance chasing".
Balance chasing is when a credit issuer lowers a limit to the current balance or just a little over the current balance.

Myth

A myth I have heard repeatedly is that you have to carry a balance to build a credit score with a credit card.
That is simply not true.

My Takeaway

The columns for the charge card and the credit card would have looked the same if you had paid the balance in full each month.
If you have a credit card, I suggest paying it in full every month just as if it were a classic charge card.
If we needed a more accurate presentation, I would have needed to take into account details such as average daily balance.
I did consider that but I decided it would bring back distant but still painful memories of me introducing myself to the captian of my high school cheerleading team.
Many of my readers would individually and collectively gesture towards their watches and say "As fascinating as what you have to say is, I just remembered that I need to be someplace else."