Many people use the terms charge cards and credit cards interchangeably, but in fact they are different. A credit card allows you to make purchases on credit, and allows you to revolve your credit balance, i.e., pay less than the full amount each month and have the remainder carry over to the following month. A charge card, on the other hand, requires you to pay off the full balance every month. (What used to be MasterCharge actually offered credit cards, which may explain why they changed their name from MasterCharge to MasterCard.) Credit cards offer greater flexibility, so why do some people choose charge cards such as traditional American Express cards?

Because American Express is the only major issuer to offer charge cards (they offer credit cards, too), we’ll use their charge card offerings as the main basis for comparison. Below are some of the reasons you might choose a charge card over a credit card:

• You must pay it off The most obvious reason to carry a charge card is its very definition—you have to pay it off each month. If you don’t want to carry debt but may be tempted with credit cards that allow you to revolve balances, a charge card imposes fiscal restraint.
• Higher or no credit limits Because you are paying off your debt each month, charge cards generally allow you to put more expenses on the card, either via higher credit limits or by waiving credit limits altogether (although you’ll definitely hear from the company if you suddenly put $50,000 on your card without a history of such behavior). This is an obvious advantage for those who use credit cards for business expenses.
• Greater rewards, although with a fee This directly refers to American Express charge cards, all of which charge some sort of annual fee. That said, reward programs of American Express charge cards are often much more generous than on credit cards, from double points to more desirable reward partners to free companion airline tickets and hotel upgrades, to free memberships in “elite” travel programs from airlines, hotels and rental car companies.
• Insurance coverage Again, this is an American Express advantage not necessarily inherent in the concept of charge cards. However, American Express does offer free insurance coverages that will replace items you’ve purchased via your charge card, as well as certain travel protections.
• More comprehensive expense tracking American Express is known for detailed expense records, allowing for easier tracking of past charges, as well as annual records that allow for tracking by spending category (this may be more beneficial to businesses, but can be useful to anyone that’s ever looked at their credit card statement and said “Who is Pers Tlv Srvcs that I paid $79.95 to?”)
• Prestige? While a charge card won’t make you a better person, some people do get a certain satisfaction out of flashing an American Express charge card, as it may suggest a certain credit level, business authenticity and other nebulous grandiosity that potentially could impress someone 🙂

Whether a charge card is better for you than a credit card depends on your personal needs, but if you now understand the difference between the two, you’re one step closer to deciding.

Published 09/07/10