Blog > Charge Cards vs. Credit Cards: Which is Right for Your Business?

Charge Cards vs. Credit Cards: Which is Right for Your Business?

By |Published On: July 10th, 2024|

Understanding the nuances of a business charge card versus a credit card is essential for any company looking to optimize its purchasing power and financial management.

Charge cards, often overshadowed by their credit card cousins, offer unique benefits for businesses. They typically require the balance to be paid in full monthly, which can instill disciplined spending habits. A corporate charge mechanism eliminates interest charges for companies that can afford to clear their dues regularly, thereby improving cash flow.

This article will explain the differences between charge cards and credit cards, use cases for each, and help you determine which cards are best for your business.

What is a charge card and how does it work?

Charge cards, provided by financial institutions, allow cardholders to make purchases and pay for them later, typically at the end of a billing cycle.

whats a charge card

The key difference between charge cards and traditional credit cards is that charge cards require the user to pay off the entire balance each billing period. There is no option to carry over a balance from month to month with a charge card.

While charge cards don’t have a preset spending limit, this doesn’t mean unlimited spending. The charge card issuer will approve purchases based on various factors, such as the cardholder’s payment history, spending habits, and financial resources.

At the end of each billing cycle, the cardholder receives a statement listing all transactions. The total amount on this statement must be paid by the due date to avoid penalties. Failure to pay in full may result in late payment fees, restrictions on card usage, or cancellation of the charge card.

Charge cards can help build a credit score because issuers report activity to credit bureaus. However, because there is no preset limit, they do not factor into the credit utilization ratio, a component used to calculate credit scores. Charge cards often cater to individuals with excellent credit scores and are commonly used for business expenses.

Charge cards vs. credit cards

Understanding the differences between charge cards and credit cards is essential for determining whether they are the best option for your business.

business charge card vs credit card

Here’s a full breakdown of charge cards vs. credit cards:NP

Features  Charge Cards  Credit Cards 
Spending limit  No pre-set spending limit  Pre-set spending limit 
Payment due  Full balance due each month  Minimum payment due each month 
Interest charges  No interest charges (if paid on time)  Interest charged on carried balance 
Annual fees  Often higher  Varies depending on the type of card 
Rewards programs  Usually has rewards programs  Has rewards programs 
Credit impact Requires high credit score and does not impact credit utilization ratio  Credit score requirements vary depending on the card and impacts credit utilization ratio 
Building credit  Beneficial for building credit history  Helps build credit if used responsibly
Payment flexibility Offers good flexibility, can pay whenever but needs to still be responsible  Less flexible because card needs to be paid in full each month
Suitability  Better for business who need to pay off balances over time rather than right away  Good for businesses that want rewards and can pay off within a month 

The main differences between charge and credit cards are their payment models and spending limits. Charge cards require the user to pay off the balance each billing period – there’s no option to carry over a balance from month to month. In contrast, credit cards can carry this balance month to month.

The following section will explore these differences in more detail to understand how each card type can impact your business’s financial management and spending habits.

Four differences between charge cards and credit cards

Understanding the distinct differences between charge cards and credit cards is critical when exploring options for business financial tools.

Four key differentiators between charge cards and credit cards are their eligibility requirements, spending limits and utilization, payment terms, and impact on credit scores.

1. Eligibility requirements

Eligibility requirements differ when considering a business charge card or credit card.

For business charge cards, approval often depends on a company’s financial health, revenue, and creditworthiness. A robust credit history and excellent credit score are crucial due to the higher risk the charge card issuer takes, given there’s no preset spending limit and the balance is to be paid in full each cycle.

On the other hand, business credit cards typically require a good to excellent credit score, and considerations may include the business’s revenue and credit history. However, the criteria can be more lenient than business charge cards, as credit cards tend to have a preset spending limit, which helps limit the issuer’s exposure.

2. Spending limits and utilization

When comparing business charge cards and credit cards, a central aspect is spending limits and utilization.

Despite business charge cards typically not having a preset spending limit, this doesn’t mean unlimited spending because purchases are approved based on payment history, credit record, and financial resources. This may benefit enterprises that experience fluctuating expenditures, allowing for greater flexibility during peak business periods.

Business credit cards have a defined credit limit, restricting the maximum balance that can be carried. Limits are set by the credit card issuer based on factors like credit history and business revenue. This cap also influences the credit utilization ratio, a critical component in credit scoring. A high ratio of outstanding balance to credit limit can negatively affect credit scores. Without preset limits, charge cards aren’t factored into this ratio similarly.

A business charge card may offer the necessary leeway for businesses to manage significant or unpredictable expenses without impacting credit utilization. However, staying within the bounds of a credit limit on a business credit card may aid in budget control and maintain a healthier credit utilization ratio, potentially boosting credit scores.

3. Payment terms

Payment terms are crucial when deciding between a business charge card and a credit card. The main distinction lies in how the balance is managed.

The balance for business charge cards must be paid off at the end of each billing cycle. There’s no option to carry over a balance from month to month. This can instill financial discipline, requiring the business to clear its debts regularly. Still, it may offer little flexibility during cash flow crunches.

In contrast, business credit cards allow minimum payments, with the remaining balance carried over to the next cycle, which can provide breathing room during tight financial periods. However, it can accrue interest, leading to higher costs if the balance isn’t appropriately managed.

4. Credit score impacts

The impact on credit scores between charge cards and credit cards is a critical operational factor to consider.

Charge cards don’t have a preset spending limit, meaning they typically don’t affect the credit utilization ratio, a significant factor in calculating credit scores. Unlike credit cards, where a high balance relative to the credit limit can lower scores, charge card balances don’t contribute to this ratio.

However, late payments are detrimental to both card types. Payment history is a substantial component of credit scores, and both late payments on charge cards and credit card issuances are reported to credit bureaus. Consistent on-time payments will favorably influence credit scores.

While business charge cards usually require the total balance paid off each month to ensure no balance is carried over, credit cards allow for minimum payments. However, carrying a balance from month to month on a credit card can accrue interest and potentially negatively affect credit scores if the outstanding balance becomes too high.

Who should use a charge card?

Identifying the most suitable financial tool can be pivotal to the success of your business operations. Charge cards can offer numerous benefits for various companies and industries.

Charge cards may be the best fit for an entity with the following characteristics:

  1. Consistent cash flow: Businesses with robust and reliable revenue streams can benefit from using a business charge card, as the entire balance must be paid each billing cycle.
  2. High spending and quick repayment: Charge cards can be helpful for companies with heavy spending habits that repay quickly due to the absence of preset spending limits.
  3. Credit building: A charge card can positively contribute to credit reports if the cardholder makes timely payments. This benefits businesses looking to build or maintain an excellent credit score.
  4. Organized accounting: Firms that want to simplify expense tracking may choose a corporate charge card since it allows for streamlined reconciliation of business expenses without the rollover of a balance from month to month.
  5. Avoiding debt accumulation: Charge card users avoid accumulating debt because, unlike business credit cards, they can’t make minimum payments.

Entities with controlled spending habits and the ability to clear their balances in full monthly are prime candidates for charge card usage.

Choosing the right card for your business

When selecting a card for your business, the decision hinges upon understanding the key differences between charge cards and credit cards.

Best charge cards for July 2024

When reviewing the best business charge cards available in July 2024, several standout options are designed to accommodate the diverse needs of businesses.

Charge Card  EBizCharge Rating  Annual Fee