Charge cards, those seemingly old-fashioned predecessors to the ubiquitous credit card, make a lot of financial sense. They also offer much of the convenience that a credit card offers, without a credit card’s potential for fiscal mayhem. The basics of charge cards are pretty simple to grasp.
When you get a charge card, you are getting a line of credit that must be paid back every month in full. In fact, the credit you get with a charge card is more like a short-term loan than it is a line of credit. With a charge card, you can use it over the course of your billing cycle all the way up to your limit, and you won’t be charged any interest on it. This is one of the most important aspects of a charge card to keep in mind, because many people get overwhelmed by their credit cards’ high interest rates, which add on more expense to all purchases the longer the balance goes unpaid. One way to think of a charge card is that as a “reward” for paying off your balance in full at the end of every billing cycle you don’t have to pay any interest.
Another basic aspect of the charge card is that some actually have no limit to what you can spend in a month – but remember, whatever it is you spend must be paid back at the end of the billing cycle. If you appear to be in default in such a situation the charge card issuer can give you a limit.
“If charge cards charge no interest on your balance, then how do they make any money?” you may be wondering. The answer is through annual fees and enrollment requirements, and through penalties applied to late or partial payers. The penalties are often calculated as a percentage of your balance, so if your charge card charges 5% of your balance as a fee, and your balance is $5,000, then you could get socked with a $250 penalty if you don’t pay off your balance.