Charge Cards

How to Choose a Charge Card

Charge cards are similar to credit cards, but they usually require you to pay your balance in full each month. This means no minimum payments and no carrying over debt month after month, and you'll usually need excellent credit to get approved. While they may not be the best option for everyone, charge cards do have distinctive benefits that appeal to both business owners and individuals.

There are quite a few different charge cards. Here are three factors to consider before deciding on one:

• Annual Fee: Since the company that issues your charge card won’t be making money off interest accumulating on your outstanding balance, most charge cards include an annual fee. These fees range from about $95 per year to upwards of $450 per year.

• Rewards: The higher annual fee often enables charge cards to offer better rewards programs than those offered by credit cards. Some of these perks may include 24/7 concierge services, exclusive access and discounts on event tickets, and cheaper rates at hotels. Make sure the rewards you get are worth the cost, though; better rewards come with higher fees.

• Credit Limits: Charge cards have higher limits than credit cards because you have a shorter period of time to pay off your balances. Limits do exist, however, and charge cards may not be as upfront as credit cards about these limits. Some charge cards come with No Preset Spending Limit (NPSL), which cardholders may misinterpret as unlimited spending capability. But NPSL really means that the company can change your spending limit based on factors like your income, spending patterns, and payment history. The issuing company can change your limit on a monthly basis if they’d like, making it difficult to find out your actual current limit.

Benefits: Using a Charge Card

While charge cards share some similarities with credit and debit cards, they also have some unique benefits:

• No Interest Charges: Your balance is generally due in full at the end of each month. This helps lessens the risk of accumulating interest on debt, so the purchases you make won’t end up costing more than you originally paid for them as long as you pay in full.

• Flexible Spending Limits: Higher spending limits can be a useful feature, especially for business owners. Charge cards provide them with easy, short-term financing for large purchases of equipment or inventory.

• Prestige: It’s a superficial benefit but not an insignificant one. Charge cards are a well-respected form of plastic, and they are usually available only for people with excellent credit histories. For both business owners and individuals, using a charge card can signal a level of financial or business success, plus credibility.

Drawbacks

Charge cards are not without disadvantages, especially compared to credit and debit cards:

• Less Flexibility: Sometimes it’s useful to have the option of taking an extra month or two to pay your balance. However, failing to pay your charge card balance in full at the end of each month can result in late fees and an inability to continue using your card until the debt is paid. This can be especially problematic for business owners: An unexpected expense combined with late customer payments can result in cash flow issues and an inability to pay when the bill arrives.

• Discipline Required: Having a charge card means being disciplined enough to set up and stick to a budget. They require more discipline than credit cards, which let you carry over a balance, or debit cards, which won’t let you spend more money than you have in the first place. You have to know what your personal spending limits are and stay within them.

• Impact on Credit Score: One of the factors in calculating your credit score is credit utilization, or the amount of debt you have compared to the maximum amount you can borrow. Lower percentages are better for your score. Charge cards can make your debt utilization look a lot higher than it actually is because they have no set credit limit. Without a credit limit, some scoring models substitute your highest balance to represent the most you can borrow. So if the most you ever spent with your card in a month is $5,000 and you have a balance of $3,000 in a given month, your debt utilization is 60%. On a credit card with a set limit of $10,000, your debt utilization would be just 30%. Fortunately, this scoring anomaly would be a bigger problem for people with short or poor credit histories, but they are less likely to be approved for a charge card in the first place.

Charge cards come with a very specific set of rules and requirements, so make sure you know what you’re getting into before you apply for one. Start by comparing charge cards to more traditional alternatives like credit and debit cards to determine which option is the best fit for you. The annual fees attached to charge cards are not insignificant, so be sure that the card you choose will both suit your financial needs and pay for itself through the rewards and other perks it offers.