Charge Card vs Credit Card

Introduction

This page will explain the difference between charge cards and credit cards for cards issued in the United States.
I will concentrate on explaining statement periods.
When many people think of American Express they think of charge cards.
However, American Express currently offers both its traditional charge cards and credit cards.
Credit cards are also issued by credit unions, full service banks, and also by companies such Capitol One and Discover which are focused more narrowly on credit cards.
As we stated in the Types Of Credit page, charge cards and credit cards are examples of revolving lines of credit.
Ideally, you should manage your credit cards as if they were traditional charge cards whose statement balances must be paid in full.

​No Preset Spending Limit ( NPSL )

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

​Simplifying Assumptions

In order to make the table that will follow easy to understand for the largest number of people, in addition to not drilling into interest calculations, I am going to make some simplifying assumptions as described below.
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, for the credit card I am going to assume that the minimum payment is 2% of the statement balance and:

• If the statement generated is not carrying forward any unpaid balance from a previous statement, then any payment will go towards principal.
• If the statement generated is carrying forward any unpaid balance from a previous statement, then 2% of the statement balance will be charged as interest.
  Interest rates have been unusually low the past few years, but historically 24% has been a plausible interest rate for a credit card.
  Divide 24% by 12 months and you get 2% per month.
• Statement begin and statement end dates magically line up with calendar months.
• None of the transactions in the table are balance transfers or cash advances.
• The credit card does not have any kind of zero or reduced interest promotional rate.

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:

• "I appreciate simplifications that help me bootstrap my knowledge."
• "You have deviated from reality, so I can never accept anything that you have to say."

In terms of learning this material, it does not matter whether I think this presentation makes sense or whether your neighbor thinks it makes sense.
The only thing that matters is whether the presentation is useful to you.

​Previous Period Due Date Through Current Period Close

This section regarding due dates and statement closing dates relates to the table above.
You will need to shift the dates to match your statements to see how this information applies to your accounts.
If you are patient, we will discuss the shifting of dates in exercises 4 and 5 further down this page.
The first statement period shown in the table above is from September 1^st through September 30^th.
The payment for charges that occurred during the first statement period is due October 25^th.
The second statement period shown in the table above is from October 1^st through October 31^st.
Specific to the examples in the table above, the payment for charges made October 1^st through October 31^st is due November 25^th.
That includes charges made on the payment due date of October 25^th for charges made during the first statement period through October 31st, the end of the second statement period.
If you submit a payment that is rejected for insufficient funds and neither your bank nor the creditor then closes any of your accounts, that on its own is not definitive proof that your God is the One True God, but it is a datapoint in that direction.
If you belong to a religion where the local leaders know the members in person by name, consider putting a little extra in the collection plate once your affairs are in better order.

​Billing Cycle Exercises

The goal of this page is to explain the concepts. It is the responsibility of each reader to map how those concepts apply to his or her own accounts. However easy or difficult you find the following exercises, keep in mind that exercises 1 through 3 will be to some degree artificially easy because the statement periods in the table above line up on calendar months, while those of your credit cards quite likely will not.
For each exercise, calculate how the transaction would impact the Charge Card column the table shown above in the "​Example Billing Cycles" section.
The exercises are intended to be performed individually as if no exercise other than the one you are working on had taken place.
For each exercise, if that transaction were added to the table above:

• Which due date would be impacted?
  and
• Instead of the value in payment value listed in the table above, what would the new total payment due amount be for that date if that additional posted transaction were included?

When you expand the Solution section for each exercise, there will be a table with Before and After columns.
The Before column will repeat data from the table above.
The After column will repeat data from the table above but also include the additional data from the exercise.
Before looking at the solutions, if you are on your desktop or laptop, consider creating an Excel worksheet with the before and after posted charges.
Something like this:

Exercise 1

On October 17^th a charge posts to the charge card from a grocery store purchase for $178.

Exercise 2

On November 3^rd a charge posts to the charge card for a purchase at a gasoline station for $63.

Exercise 3

On October 28^th a charge posts to the charge card from an electronics store purchase for $467.

Regarding Exercises 4 and 5

For exercises 4 and 5, you are going to take what you have learned so far and test whether you know how to apply it to your own accounts.
Assume that the purchases in the table in the Example Billing Cycles section have been made, but none of the payments.
I will ask you to derive the payment amount and payment due by date to get you to engage with the material.
In real life, that information will be provided on your billing statement.
Please do not automatically assume that in real life the payment due by date will or will not be 25 days after the statement period as in my examples and exercises.

Exercise 4

Instead of the first statement period lining up on the month of September, assume that the first statement period was from the first instant of August 20 through the last instant of September 19.
Assume that the first payment is due 25 days after the statement close date of September 19.
Your mission should you choose to accept: write down the date and amount of the first payment due.

Exercise 5

Instead of the first statement period lining up on the month of September, assume that the first statement period was from the first instant of September 6 through the last instant of October 05.
Assume that the first payment is due 25 days after the statement close date of October 05.
Write down the date and amount of the first payment due.

Exercise Summary

If I were to ask a random person when he or she first learned the months of the year, his or her reply would likely be something such as "Not sure, I have known them as long as I can remember".
Having the statement periods line up on calendar months was intended as a gentle way to introduce statement periods.
I could have created a table with statement periods that straddled the end of one month and the beginning of the next month.
Those very few people whose statements happened to line up on those same dates might have said "This... this is perfect. This is just what I needed".
Everyone else would have had to slide the Statement Begin Dates, Statement End Dates, and Payment Due Dates to line up with those of his or her statements, just as we did in exercises 4 and 5.
Regardless of how much effort I thought I put into creating the table and the exercises above, there is nothing especially memorable about the specific dates and amounts.
Consider yourself free to return to use the exercises to perform a refresher every so often.

​Building Credit

A myth I have heard repeatedly is that in order to build your credit score you have to carry a balance as in the example in the Credit Card column in the table in the ​Example Billing Cycles section of this page.
That myth is just that. A myth. It is NOT true.
You might find yourself carrying a balance because either you made an informed choice to finance a purchase or events simply got away from you.
Please do not carry a balance as in the Credit Card column under the mistaken belief that it will help your credit score.
Using either a charge card or a credit card as shown in the Charge Card column of the table in the Example Billing Cycles section is a completely valid way to build credit.

​Utilization

As I stated in the previous section, carrying a balance is not necessary for building a credit score.
If fact, not only is it not necessary, it is far from optimal.
Allowing balances to accumulate will likely lead to an increase in your credit utilization.
Credit utilization as reported to credit bureaus as of an instant in time is an important part of widely used credit scores.
Credit utilization is credit used divided by credit line.
The rules behind credit scores are somewhat like the magic in the Chronicles of Narnia by C. S. Lewis.
Once you think you finally understand the rules, there are additional twists.
We will cover credit utilization and some of the associated twists in greater depth in a later page.
For now, I will say that lower credit utilization is better than higher credit utilization.

​Balance Chasing

If your credit used continually increases without ever getting paid down, your credit card issuer may become concerned that at some point you will not be able to make payments at all.
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.
Balance chasing can touch off a negative feedback loop where one or more revolving credit issuers lowers your credit line, which raises your credit utilization, which lowers your scores, which leads to more rounds of lowering credit limits.

​Potential Backfire?

There is a danger that the message of this page could backfire.
At many car dealerships, salespeople are instructed to sell vehicles on the basis of monthly payment.
Naive consumers go along with technique, or worse yet they decide on their own to negotiate the purchase in terms of monthly payments.
While automobiles are known for being depreciating assets, goods and services typically purchased with credit cards lose their value far more quickly.
Is carrying a balance such that you are charged interest at typical credit card rates prudent?
Let's put it this way: Bernie Madoff promised investors returns of around 18% during a time when interest rates were higher than they were in 2022.
Maybe you can pull that off indefinitely but Bernie Madoff could not.

​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 captain 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."

💡 Cash Flow Tip

Below are two of however many scenarios where the cash flow tip to come does not apply.

• Purchasing pharmaceutical products prescribed by a physician for someone you are responsible for.
  Unless you are buying additional doses of medicine that you are certain you will have an adequate supply of, with pharmaceutical products you may not have the luxury of time.
• Making a deposit on a timeshare.
  For a timeshare purchase, I strongly suggest that you be less concerned with how to make a deposit and more concerned with whether buying a timeshare makes any sense for you.
  For most people, I am highly skeptical that it does.

For purchasing decisions where you do have flexibility, consider the following tip:
As you may have deduced from "Statement Cycles" tab, you can maximize your short-term cash flow if you make a purchase just after a card's statement period ends instead of just before it ends.†
If you make a purchase on a card the day after its statement closes you would have about 30 days until the card's statement is even generated.
Then you have more than 20 additional days until your payment is due.
Close to 2 months, but I advise not cutting making the payment that closely even if you are paying online.
You could have planned to make the payment online on the due date only to find:

• There is an internet outage in your area,
  or
• that your laptop computer has decided that right now is the ideal time to begin installing 2 hours worth of mandatory software patches.

Just like any other hypothetical scenarios, neither of the above scenarios matter until one of them happens to you.
All other factors being equal, if you have more than one credit card, for a major purchase you might choose to use the card whose statement has closed most recently.
What I do NOT want to hear, however, is that someone has made purchases that he or she cannot ultimately afford but he or she hopes that somehow between now and when the payment is due the money fairy will magically wave her wand and take care of it.

Enough Rope To Hang Yourself With?

It might be tempting to advertise this tab on this page with text such as "Secrets your credit card company does not want you to know!!"
However, as with most clickbait worthy advertisements, such an advertisement would simply not be true.
In fact, as incentives for opening new credit card accounts, major banks often provide introductory zero interest promotions for the first year or more of having a given card.
Statistically, some number of those new customers will not be able to pay off those balances before the zero interest period ends.
Some customers will even borrow to put money into meme stocks or fall prey to cryptocurrency and/or foreign exchange scams.
If meme stocks were in any way sure things, banks would be in the business of buying meme stocks themselves, not providing credit.
Cryptocurrency and foreign exchange scams are just that: scams.

† Determining the absolute last date/time for which a given charge will appear on a given statement is a matter of guesswork.
Theoretically you can make a purchase before your statement closes and have it appear not on the bill for current statement period but rather for the following statement period.
When you purchase something with a charge or credit card, the transactions happens and then there is however much time until the transaction is posted and settled.
That time might range from a few hours to a few days.