No Limit, No Interest: What’s the Deal with Charge Cards?
Charge cards, like their credit card cousins, allow cardholders to use plastic cards to make purchases and then pay at the end of a settlement period, typically on a monthly basis. The main features of charge cards are no revolving credit (the balance must be paid in full each month) and no pre-set credit limit (this does not mean no limit at all).
There are some features specific to charge cards that could instill financial discipline for consumers and business owners. If you want the convenience and security of credit cards, without the risk of incurring debt and paying finance charges, a charge card may be for you.
No revolving credit. A true charge card, such as the ones offered by American Express, Diner’s Club International, and MasterCard International (Eurocard), allow the cardholder to pay with plastic but require payment of balances in full for each statement cycle. Because credit is not extended, there are no finance charges, no APRs to consider. However, late payments may incur flat fees and charges calculated as a percentage of the outstanding balance.
Business owners have additional flexibility. American Express, for example, has an “extended payment option” for travel expenses or capital equipment purchases; finance charges are applied to outstanding balances associated with these transactions. Additionally, their Plum Card allows cardholders to defer payment up to 60 days.
No pre-set limit. Another charge card feature is the no pre-set spending limit. There are limits, just not numbers that show up on card offers (which often mention the highest possible limit) or on monthly statements. Charge card providers may authorize card charges based on criteria such as credit scores, income, and payment history. According to American Express, “No pre-set spending limit does not mean unlimited spending. Purchasing power adjusts with your use of the Card, your payment history, credit card record and financial resources known to us, and other factors.”
The charge card, then, could help instill discipline in cardholders as they may be less apt to overspend if they realize that balances must be paid in full every month. And, not having to pay finance charges could reap cost savings. Similarly, though, a well-disciplined credit cardholder could use the same pay-in-full tactics and also avoid finance charges.
In researching types of charge cards, I noticed that Kohl’s offers a Kohl’s Charge Card, which is really a credit card that finances Kohl’s store transactions only (its name may distinguish it from an affinity credit card that can be used with other merchants, such as L.L. Bean’s credit card). Balances can be carried over from month to month, and interest is charged on these balances. So, check the terms of the agreement rather than relying on the card’s name to understand its uses and your obligations.
So, why bother with a charge card? Being required to pay balances is a great incentive to keep spending in check while enjoying the convenience of plastic. But consider all features and your planned purposes before signing up for a new card.
Charge Card Summary
- No finance charges
- Balances must be paid monthly or every statement cycle
- No funds are automatically taken from bank account*
- No pre-defined spending limit
- Late charges billed for late payments*
- No annual fee*
- Discounts on certain products or services*
- Specialized insurance (such as travel insurance)*
*These features may also be found in a credit card.