Charge Card Vs Credit Card: A Small Business Owner’s Guide

Were you convinced that charge cards and credit cards are one and the same? If so, you’re not alone. Few SMB owners truly understand the difference between charge cards vs credit cards, even though the type of card your customers use determines what you pay as monthly payments to your credit card processor.

In this article, we’ll take a look at everything you need to know about charge cards and credit cards for your small business. We’ll review how they work and the perks of charge cards vs credit cards. We’ll also delve into the similarities and differences between them, and when to use which one. 

Let’s get started.

What is a credit card?

Credit card companies allow customers to borrow money from their financial institutions. The credit card issuer is paid back for the loan with the addition of a monthly interest charge. That’s how they make their money. 

The financial institution sets the cardholder’s spending limit. They also determine what retailers pay for processing credit card transactions.

Customers typically face late fees if they can’t meet their monthly minimum payment. And they have to pay the money back at the interest rate determined by their card provider.

Some retailers also add the cost of credit card processing to their customer’s transaction fees. This is called “surcharging,” or passing the fee of credit card processing along to the customer. 

Others only slap surcharges on certain cards –– often American Express cards, because they are the most expensive to process. Merchants can’t legally charge customers more than 4% of each transaction as surcharges for credit card processing.

How do credit cards work?

The best credit cards are widely accepted at different retailers, ATMs, and financial institutions. A customer’s credit line determines how much they are able to borrow from their financial institution on that credit card. Customers have a credit card limit, which is determined by the credit bureau’s credit report.  

Credit bureaus provide information that the credit card company uses to determine whether to issue an account to a particular customer. Credit bureaus also help the lender to determine each customer’s credit line, or available funds limit.

The credit bureau compiles data on every potential cardholder’s payment history, income level, and credit utilization. This ultimately determines that customer’s credit score, which determines the offers they’re privy to.

Credit card companies make their income by charging interest fees, in addition to late payment fees. Interest fees are tacked onto a customer’s total every month they don’t pay off their balance in full.

What are charge cards?

Charge cards look almost exactly like credit cards, but they operate quite differently. That’s because charge card balances need to be completely paid off every month. They often come chock-full of benefits that incentivize customers to spend with the issuing retailer. Charge cards are more commonly issued by major retailers and not SMBs.

But keep in mind: Charge cards are often from a specific retailer and only apply to purchases within their store. It’s important to train your retail associates to recognize the difference between charge cards and credit cards. This will help you avoid the checkout lane traffic that happens when a charge card is repeatedly declined.

At this point, you may be wondering why a customer would opt for a charge card over a credit card. There are a few different reasons that customers opt for a charge card vs a credit card, most related to personal finances.

Many retailers offer an initial discount when customers set up their charge cards. Retailers offer savvy signup incentives because charge cards are proven to increase customer loyalty. So, retailers may offer up to 30% off on purchases that day, or a lofty signup gift. As you can imagine, 30% off of a big purchase such as furniture can make a big difference in cost.

How do charge cards work?

Charge cards require customers to pay off their full balance each billing cycle. And some charge cards, such as travel cards, require customers to pay an annual fee. But for some rewards charge cards, the rewards outweigh the cost of the card.

Charge cards have no official preset spending limit. However, just because charge card spending limits aren’t made public doesn’t mean they don’t exist. A customer will simply get declined once their spending surpasses their available credit –– which they weren’t made aware of.

In a way, charge cards work similarly to other pay-over-time options. Customers get to take home the products on the same day but don’t have to pay until their statement arrives. Similar to credit cards, however, customers still face a late payment fee if they aren’t ready to pay in time.

Most large retailers offer some type of charge card. Amex also has a few options if customers are looking for a card from a more traditional financial institution.

Charge card vs credit card: Key similarities and differences 

Now that we’ve covered the basics and how each type of card works, let’s take a look at the similarities and differences between charge cards and credit cards.

Credit score

Charge cards are not considered as part of customers’ credit utilization after a FICO score of 8. This means they have less impact in most credit scoring models than their debit card or credit card usage.

Customers’ credit card utilization, on the other hand, directly impacts their credit score. They can greatly improve their credit score with low credit utilization and on-time payments.

However, both charge card issuers and credit card issuers report on-time payments to credit card bureaus.

Credit limits

Unlike credit cards, charge cards rarely come with a pre-set spending limit. But this doesn’t mean that customers can go on an unlimited spending rampage at their retailer of choice. A customer’s bad credit will still decrease their spending limit with a charge card.

Credit requirements

This is one of the key differences between charge cards and credit cards. Charge cards require customers to have great credit to be accepted.

Credit cards, on the other hand, offer greater flexibility. Many credit cards are designed to be used to build credit. However, there are also business-tier credit cards, such as platinum cards or black cards. So there are options from a wide variety of lenders.

Fees and charges

Customers need to pay interest with credit cards. What a customer pays is determined by the APR or annual percentage rate on their account. While charge card companies don’t charge interest, both charge cards and credit cards can have high annual fees.

Cardholders should be advised to compare and weigh the costs and benefits of any charges or features they may incur.

Charge card vs credit card: Pros and cons

Here’s a quick glance at the pros and cons of charge cards vs the pros and cons of credit cards.

Charge cards 

Since charge cards are paid off in full each month, they’re a great option for customers who are scared of spending more than they make. However, since charge cards have no official spending limit, they’re a risky option for that same customer.

Charge cards are also usually only accepted at one retail chain, making them a limiting option for customers who want to rack up rewards points. With that said, charge cards usually offer heftier rewards than most credit card companies.

Credit cards

If a customer can pay their bill by its due date, credit cards offer the best option to build credit. However, credit card companies can cause customers to go into debt from interest if they can’t pay their balance right away.

Charge cards are maybe better known for their benefits. But credit card companies like Citi Rewards Card are coming in hot with offering 5% cash back on purchases. Credit cards often have promotions that offer 0% interest for a period of time, making them a great choice for big purchases. You won’t find this with charge cards, which are designed to be paid off each month.

Is one better than the other?

So, to answer the question of charge cards vs credit cards, you first need to consider your customer’s needs. If they need to build credit, credit cards are probably the only type of card they’re eligible for. With that said, credit cards now offer competitive rewards and warranties. Soon retail charge cards will be phased out entirely in favor of Amex cards and retail apps.

At the end of the day, you can’t control whether customers use a charge card or credit card at your store. But you can review your SMB’s financial products to save on payment processing. 

Payment Depot saves retailers like you an average of $400 a month on payment processing with its membership-based pricing with zero markups or hidden fees. Connect with Payment Depot’s award-winning customer service team today to learn more!