Lawrence Chui, PhD, a certified public accountant and an associate professor of accounting at the Opus College of Business at the University of St. Thomas, appeared in an Ask the Expert column on the personal finance website WalletHub to discuss spending habits and charge cards versus credit cards. The conversation is reprinted below with permission.
What types of people should consider getting a charge card?
Unlike a credit card, there is no hard and fast spending limit on a charge card. Charge cardholders will need to pay their balance in full each payment cycle or face stiff late payment penalties. Business owners can consider getting a charge card as it provides more flexibility in terms of spending limits as compared to a credit card. Individuals who are motivated to pay their balance in full could also consider getting a charge card. Additionally, there is no credit utilization for charge cards. A high credit utilization could negatively impact the cardholder’s credit score. People who are disciplined in paying off their balance in full and yet regularly spending close to their credit limit should also consider getting a charge card.
Do you think charge cards are effective at promoting disciplined spending and payment habits among users?
In short, yes. Charge cards can be effective at promoting disciplined spending and payment habits among cardholders. Unlike a credit card which offers cardholders the option to make a minimum monthly payment, charge cardholders will face a fine if they do not pay their balance in full each cycle.
Do you think a charge card is inherently less valuable than a normal credit card given the lack of financing functionality?
This will depend on the need of the cardholders. The benefit of having a charge card is to help motivate cardholders to be more disciplined with their spending. Since cardholders are required to pay off their balance in full each payment cycle, there will not be any interest charges. If cardholders are looking to have a revolving limit with the flexibility to not pay off their balance in full during each payment cycle, a credit card would be a better option.
Does a charge card need to offer better rewards and charge lower fees to compete with standard rewards credit cards?
Not necessarily. Charge card offers cardholders something they cannot get from standard rewards credit cards: no pre-set spending limit. Charge cardholders also do not need to be concerned with credit utilization and how it may impact their credit score.