Credit Cards vs. Charge Cards: What sets them apart and which is best for you | Mint

All credit cards come with a pre-set credit limit. A cardholder can use the card up to the specified limit. If the usage exceeds the credit limit, some banks allow transactions up to a specified amount and charge an overlimit fee. On the other hand, some banks decline the transaction beyond the credit limit. What if you could have a card that allows you the flexibility to spend with no pre-set limit? Yes, charge cards offer this facility. In this article, we will compare credit cards with charge cards and understand which one to choose.

What is a charge card? How is it different from a credit card?

A charge card works like a credit card and allows you to pay for goods and services on credit. You get a credit period of up to 50 days. It gives you instant discounts, base reward points, milestone benefits, etc. However, a few major differences exist between a credit card and a charge card.

No pre-set credit limit

The first difference is about a credit limit. A credit card has a pre-set credit limit. For example, suppose you have a credit card with a credit limit of Rs. 1 lakh. In this case, you can use the credit card to pay for goods and services up to Rs. 1 lakh. A charge card doesn’t have any pre-set limit. As there is no pre-set limit, it gives you the flexibility to spend without worrying about any limits.

Payment of the entire monthly bill

The second difference is about the repayment. When a credit card monthly bill is generated, you can either pay fully or partially. If you choose to make a partial payment, you carry forward the remaining outstanding balance to the next billing cycle. The bank levies finance charges and interest on the outstanding balance carried forward.

In the case of a charge card, when the monthly bill is generated, the entire amount must be paid either before or by the due date. So, there is no partial payment option, and you cannot carry forward any outstanding amount due on a charge card.

No interest charge

Charge cards don’t charge interest like credit cards on the outstanding amount carried forward to the next billing cycle. However, charge cards charge a fee, which can be a flat amount or a percentage of the outstanding amount.

If the charge cardholder doesn’t pay the outstanding by the due date, the bank will report it to the credit bureaus like CRIF. In such a case, the cardholder’s credit score will take a hit. The cardholder’s creditworthiness will be hit, and they will find it difficult to get a credit card or loan in future.

Availability of charge cards in India

Compared to credit cards, the market for charge cards is limited in India and across the globe. American Express is the only financial institution in India that offers charge cards. American Express offers two charge cards in India:

1. American Express Gold Card
2. American Express Platinum Card

The Gold Card has an eligibility criteria of Rs. 6 lakhs and above personal annual income, making it suitable for middle-income individuals. The Platinum Card is a premium card suitable for high-income individuals with income eligibility criteria of Rs. 25 lakhs and above for salaried individuals. The personal annual income must be Rs. 15 lakhs and above for self-employed individuals.

Both the cards have their specified audience and offer a host of benefits like instant discounts, base reward points, accelerated reward points, spend-based offers, travel and lifestyle benefits, etc.

Even though charge cards don’t have a pre-set credit limit, it doesn’t mean your spending power with American Express charge cards is unlimited. American Express will approve your transactions based on your spending pattern, financials, credit record and account history. So, although there is no pre-set credit limit on paper, the approval for transactions above a certain limit is subject to internal set criteria.

If you plan to spend a bigger amount on an American Express charge card, you can log into your dashboard and check whether the transaction will be approved or not. In your charge card dashboard, you will see a “Check Your Spending Power” link. On clicking the link, on the next page, enter the amount you plan to spend in the “Enter the expected purchase amount” field and click submit. The next page will tell you whether the transaction with the specified amount will be approved. You can even call customer care and check whether the transaction amount will be approved.

The approval for transaction amount(s) will depend on your credit record, account history, and financial information. So, the internally set limit will be dynamic and will be increased or decreased based on the above criteria.

How should an individual choose between a credit card and a charge card?

As discussed earlier, the market for charge cards is very small in India, with only American Express offering them. However, charge cards have their own USP. Consider the following points to decide between a credit card and a charge card.

You have to spend within the defined pre-set limit with a credit card. There is no flexibility. Also, a credit card gives you the option to pay the monthly bill fully or partially by the due date. So, if you are not sure whether you will be able to pay the entire bill, you may opt for a credit card. However, please remember that banks usually charge 3.00% to 3.75% monthly interest on the outstanding amount.

With a charge card, you must pay the entire outstanding by the due date once the monthly bill is generated. So, you will use the charge card only when you know you have money in the bank to pay the monthly bill when it is generated. Thus, charge cards will help you maintain financial discipline and avoid unnecessary or spontaneous expenses. In such a scenario, you can opt for a charge card.

Both, credit cards and charge cards, have their pros and cons. Evaluate your needs and accordingly choose one that suits your requirements. You can also go for a combination of both, thus making the most of their benefits.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.