Business Charge Card vs. Credit Card: Which Is Best for Your Business?

Modern business owners are often faced with the task of sorting through financial options to support their businesses. Whether you’re sorting through options for a business line of credit or simply determining whether you want to use charge cards or credit cards, it can be tough to understand all of your options.

Many people get confused between charge cards and credit cards and use these terms interchangeably. But the truth is that they are different and come with different advantages and inconveniences, so one might be better for you than the other.

This article will discuss some of those differences and the pros and cons of each one so you can understand the solutions that are right for your business.

Charge Card vs. Credit Card

How is a charge card different from a credit card? In essence, a charge card is designed to be paid off each month. Charge cards can also help you to avoid certain kinds of fees.

How Do Charge Cards Work?

Charge cards work very similarly to common credit cards in that they allow you to make purchases with borrowed money. 

However, unlike credit cards that let you carry a balance from month to month, the balance on a charge card must be paid off at the end of every cycle. Therefore, users typically don’t pay interest rates, except in certain cases.

Five Main Differences Between a Charge Card and a Credit Card

What is a charge account vs. a credit card account? Whether you’re opening a new business or optimizing one that’s been around for a while, understanding the six main differences between charge cards and credit cards can help you to pick the one that’s the best fit for your needs.

Spending Limits

One main difference between a credit card and charge card stems from the spending limit. Credit cards usually come with a built-in credit limit that you cannot go over. Credit limits are set depending on your credit score, your income, and your other outstanding debts for a business at the time of application. 

The better your score and income-to-expense ratio are, the higher the credit limit. In order to improve your score, you don’t want to spend more than 30% of your credit limit at once. You’ll also want to make payments consistently towards your balance.

Charge cards, on the other hand, often have no preset spending limit. This does not mean, however, that you have an “unlimited spending limit.” You will still have a limit on how much you can spend, but this value can fluctuate over time-based on your payment history, how often you use the card, and your company’s overall financial health.

Payment Terms

Payment terms are another crucial difference between credit cards and charge cards. Although carrying a balance is not recommended to keep a healthy credit score and avoid high-interest rates, credit cards do allow you to bring your balance from one month to another, as long as you’ve made the minimum monthly payment. There may be times when keeping short-term cash liquid is more important than incurring interest fees.

As mentioned above, charge cards aim to help users avoid interest fees. Therefore, they must be paid off in full every month. This is a cost-saving benefit and charge cards can help you smooth out cash flow when you need it. As long as you pay your balance each month you won’t incur additional costs, however, failure to do so could result in late fees and may cause your business credit score to drop.

Late Payment Fees

Late payment fees are common for both types of cards. However, with credit cards, you can avoid these fees by submitting your minimum payment before the due date. The remaining due balance will be subject to additional fees based on your card interest rate

If you have a large balance on your charge card and you’re unable to pay it in full, you may be subject to high late payment fees. If you have irregular income coming in, it could be more difficult to make adequate payments on your charge card. That said, depending on the balance on your card, a late payment fee may cost you less money in the long run than an interest rate on a high credit card balance.

For example:

Let's compare the payments on a $5,000 balance on a charge card vs a credit card. We'll use the 2022 average interest rate for a new credit card which is 19.7%.

Credit card balance: $5,000 with a 19.7% APR.

  • Let's say you pay the minimum balance for your January statement which is $100 so you don't pay a late fee.
  • You would still get charged 19.7% interest on the remaining $4,900 statement balance which would be $80.

Charge card balance: $5,000 with no interest, but it does incur a $39 late fee if you don't pay in full.

  • If you aren't able to pay your balance in full, you would get charged a $39 flat late fee.

Now that difference may seem small in a vacuum, but over time (and with compounding interest), if you continue to carry a balance on your credit card, you will end up paying far more than $39 a month for that initial $5,000. Over a 12-month period, if you only pay the minimum balance on your credit card, you would pay approximately $943 in just interest. Even if you paid your charge card payment late every month for 12 months you would only pay $468 in late fees. 

An even more extreme example that's perhaps more of an apples to apples comparison would be if you carried the full $5,000 balance for 12 months, you would end up paying approximately 1079 in just interest, plus (let's use $39 as the late fee) an additional $468 in late fees. New call-to-action

Annual Fees

Both charge cards and credit cards typically have annual fees that vary. Earning rewards on your cards is a good way to offset those fees.

Annual fees typically range from $95 to $500 for regular credit cards. They are typically much higher for charge cards.

Credit Requirements

Credit cards are typically accessible to people with a wide range of business credit scores. However, the lower your credit score is, the lower your credit line will be. With a low business credit score, you’ll also face a higher APR. 

On the contrary, charge cards are only available to people with good to excellent business credit scores. Keep in mind, too, that your business credit score is different from your personal credit score.

Charge card companies take a bigger risk because there isn’t a set spending limit. They want to work with companies that will pay off their balance in full each month. For this reason, they want to confirm that business owners have a good payment history, which can be shown with a higher credit score.

Advantages of a Charge Card vs. a Credit Card

The main advantage of a charge card is the absence of interest charges. Charge cards typically keep you away from getting into excessive debt. 

Since you have to pay off your balance every month, it can build discipline in your spending habits and keep you from going overboard.

Drawbacks of Using a Charge Card

What are the primary reasons why you might not want a charge card? First of all, they aren’t equally accessible to all businesses, depending on your credit score.

There aren’t quite as many options to choose from, for those who do qualify. Charge cards may also come with very high annual fees. 

With no preset spending limit, there is a risk of going over budget and not being able to repay everything on time. With this in mind, it’s important to be very cautious to avoid having to pay expensive late fees!

How to Get a Charge Card

Charge cards are a bit harder to get than regular credit cards. With the added risk of no preset spending limit, charge cards providers are very picky about who they approve. 

American Express is the main issuer that provides options similar to charge cards, with only three types to choose from. You can apply directly on their website using your personal or business information, depending on which credit score you want to have taken into account in your application.

How Charge Cards and Credit Cards Affect Your Credit

Paying your credit cards and charge cards on time on a regular basis is the best way to build your credit. The main factor that differentiates how each one affects your score is the spending limit. 

Since credit cards have a credit line, your active balance on your accounts can affect up to 30% of your FICO credit score. 

While charge cards don’t have a preset credit limit, you may still have a daily limit. However, your balance on a charge card will not affect your score right away. As long as your balance is paid in full and before the due date on a regular basis, your charge card can help you to improve your credit score.

Choosing Between a Charge Card and a Credit Card

There is no one-size-fits-all when it comes to credit cards and charge cards. Knowing the features, benefits, and requirements of each will help you determine which one is best for you and your business. 

If you have big expenses coming up and want to pay them off over time, a credit card is the way to go. If you have great credit and just want to maintain it by paying off your debts on a month-to-month basis, a charge card may be a better choice for you.

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