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If you want to open a new line of credit to add a new payment method to your wallet or build credit, you may be debating between a charge card or a type of credit card. Each of these work differently so it’s important that you understand the differences before you make your decision.
What is a Charge Card?
Typically, when people hear the words “no preset spending limit” they assume a charge card has unlimited funds. A charge card has no preset spending limit, but it actually means your maximum limit is undisclosed and can vary from month to month. With a charge card, your issuer will regulate your limits depending on your payment history, income, and spending habits.
Charge cardholders are required to pay off their balance in full each month. Otherwise, some serious late fees and penalties can rack up. Unlike credit cards, charge cards don’t have annual interest rates (APRs). However, if a person fails to pay off their charge card balance in full and on time, hefty late fees will apply, which is usually a flat fee or around 3% of the total balance. A 3% monthly charge might not seem like much at first, but it can add up to more than double what you would be paying in interest with a credit card.
Because charge cards don’t have annual percentage rates, issuers require an annual fee, which can sometimes be hundreds of dollars. American Express Canada is the primary charge card issuer in Canada, with three different charge cards available for Canadians: the American Express Gold Rewards Card, the Platinum Card, and the American Express AeroplanPlus Platinum Card. Canadians interested in getting a charge card should note the average credit score for approval is around 690.
Pros of Charge Cards
There are many reasons why some Canadians prefer to go with a charge card instead of a credit card. Here are some of the main ones.
- More purchasing power: Cardholders can make significant payments on charge cards without having to worry as much about going over monthly limits.
- Spending discipline: Committing to full payments each month can teach users better financial discipline.
- Bonuses and rewards: Charge cards often have generous bonuses and rewards for cardholders, including eligible travel and everyday purchase points, as well as bonus signup points.
- No APRs: No APRs mean cardholders aren’t required to pay annual interest rates on borrowed money.
Cons of Charge Cards
Just like with anything, there are always some negatives. While charge cards are a great option for some, for others they may not be the right decisions. Here are some reasons why.
- High annual fees: Because charge cards don’t have APRs, users are required to pay an expensive annual fee.
- Costly late penalties: Unlike credit cards, users can’t make minimum payments on charge cards to avoid late fees. If a cardholder fails to make a monthly payment in full, the late fees are steep, and the card issuer’s reports of late payments can negatively impact your credit score.
- Fewer options: Charge cards options are limited in Canada. Unlike credit cards, where there are thousands of different options to choose from, there are only a few charge cards available to consumers.
- Not suited to subprime: Since charge cards are normally reserved for customers with above-average credit, they are not a viable credit-building option for bad credit customers.
What is a Credit Card?
Credit cards are a popular form of lending that allows cardholders to make purchases up to the pre-approved limit. Unlike charge cards, unsecured credit cards don’t have to be paid off in full each month—only preset minimum payments are required. This ability to delay payments can be both negative and positive, depending on your financial situation and spending habits.
Credit cards come with annual percentage rates (APRs), and you can avoid paying this interest if you pay your credit card bill in full every month. As long as you keep making on-time payments, credit cards are ideal for building credit as well as your overall credit health. Low-credit individuals now enjoy an easier time getting approved for unsecured cards based on the card’s credit limit. You can also earn rewards or even earn points on most credit cards. These can be redeemed in certain amounts to pay the balance or for rewards.
Financial institutions across Canada, like banks and credit unions, have been introducing credit card options for Canadians with less-than-perfect credit. There are tons of different credit cards available to Canadians who are in all types of financial situations, but if rebuilding your credit is a top priority, Capital One credit cards boast the kind of affordable rates and monthly payments that are ideal for customers with less-than-perfect credit. They have options for both secured credit cards and unsecured credit cards.
Pros of Credit Cards
In most cases, it’s necessary for Canadians to get a credit card more so than other financial products. Not everywhere takes Visa debit, and even a small limit can go a long way. Here are some other pros:
- The power to pay later: Credit cards offer a secure way to pay and put spending power in your pocket. There are obvious benefits to having access to this method of payment when you need it.
- Rewards programs: A lot of credit cards include rewards programs, including cash back and point systems that can help you earn airline tickets, hotels, and more. The higher your credit score, the more rewards and perks you can qualify for.
- Credit-building opportunities: Consistent on-time payments can help build your credit rating, as payment history and debt utilization ratio are large components that determine your credit score. Unlike charge cards, which are usually only available to people with above-average credit, credit cards are available for customers across the credit spectrum. (Please note: Prepaid credit cards do not help you build credit. We cover prepaid credit cards below.)
Cons of Credit Cards
- Buy now, pay later: When you buy now and pay tomorrow, tomorrow always seems so far away. Credit cards make it a little too easy to make purchases you can’t afford, so there’s a level of discipline required with them.
- Overdraft penalties: Although credit cards have a set limit, cardholders can sometimes go over this limit. Spending more than your limit means you can incur costly overdraft penalties.
- Interest: Unlike charge cards, credit cards come with an annual percentage rate, and high APRs can lead to hefty interest fees if you only make minimum payments and choose to carry the rest of the balance over to the next month.
Credit Cards vs Charge Cards
A charge card is a preferable option over credit cards if you spend a lot of money for either personal or business purposes and if you know that you can pay it off in full each month. On the other hand, credit cards can offer more repayment flexibility and more clarity on how much you can spend. The below table highlights the main differences between charge cards and credit cards.
| Credit Cards | Charge Cards | |
| Payment Terms | Customers are not required to pay off their total balance in full each month but must make minimum payments in order to avoid late fees. | Customers are required to pay off their total balance in full each month. |
| Spending Limits | Card issuers will approve an applicant’s spending limit based on overall credit history, and cardholders are unable to spend more once their limit is maxed out. | There is no maximum credit limit for charge cards. Card issuers will determine the preset limit of a charge card based on a borrower’s income and credit history. |
| Fees | Credit card fees include late payments and interest rates. Cardholders can avoid late fees by making minimum payments by the due date, and they can avoid high APRs by paying their balance in full every month. | There is no annual percentage rate with a charge card. Fees for late payments typically include a flat rate predetermined by the card issuer depending on the card’s terms and conditions. Charge cards also have an annual fee, which varies depending on the issuer. |
| Available Options | There are a lot of options available to customers with low or high credit scores. | Very few charge cards are on the market, which means Canadians don’t have a lot of options. Also, charge cards are normally reserved for customers with above average credit. |
What is a Secured Credit Card?
Secured credit cards are a form of secured credit issued by a financial institution and backed by collateral. A secured card acts like a regular credit card in almost every respect, except you agree to place a security deposit equal to the limit amount when you apply. The fine print will specify what their secured cards require, as well as interest charges and any other pertinent information.
Secured credit cards are an excellent option for subprime Canadians who have lower-than-average (or no) credit scores. Because the card is secured with collateral, customers usually have a far better chance of getting approved and establishing or rebuilding their credit profiles.
Details on this line of credit are reported to the credit bureaus, and when you consistently pay off your balance, your credit score will gradually improve. In terms of interest rates for secured credit cards, applicants pay interest on outstanding balances. However, each credit card is different and will have its own set of details in the credit agreement.
What is a Prepaid Credit Card?
With a prepaid credit card, you loan money on the card from your bank account and make purchases until the funds are gone. You can then load more money on the card whenever you like. There is no monthly payment and no interest to pay, so you don’t have to worry about the end of the billing cycle. Essentially, it’s a debit card that you use to make debit card purchases. It’s treated similarly to a chequing account with standard monthly fees that aren’t based on how you spend money.
Prepaid credit cards, essentially prepaid debit cards, make a safe payment method if you are travelling overseas, and they are accepted internationally. You also don’t have to worry about debt since you can only spend when you deposit money onto the card. However, since you are not borrowing money, prepaid credit cards will not help you build up your credit profile and don’t add a credit line to your account. When it comes to charge cards vs prepaid credit cards, prepaid cards have much lower fees.
The Best Card To Build Credit
Besides the prepaid variety discussed above, credit cards offer fantastic credit-building opportunities, and so do charge cards. With both methods of payment, you get the opportunity to prove you can make payments consistently and on time. Proving your trustworthiness will build your credit score over time.
However, one of the key factors that determine your credit score is the debt utilization ratio. Your debt utilization ratio compares how much credit you’re using against how much you have available. Since charge cards don’t officially have a maximum limit, credit bureaus won’t look at the debt utilization ratios of charge cards. Therefore, credit cards might be preferable for credit-building purposes.
However, if you have bad or no credit, it can be difficult to get approved for a charge card or credit card with high spending limits. There are ways to get a credit card with bad credit in Canada. You need to start small and work your way up.
Cards Vs Overdrafts
While overdrafts are very common in Canada, you also need to have a good credit score in order to get one. If you don’t have a good credit score, then it’s important to have a good relationship with your bank. If that’s the case, you may not need to meet the minimum credit score requirement.
However, overdrafts don’t really take the place of a card. Cards are used to build your credit score and everyday spending. The point of an overdraft is to cover emergency expenses and to pay it off as soon as possible. If you don’t, you could end up with some heavy overdraft fees. However, you can also pay a lot of interest if you don’t pay your cards on time.
How Spring Can Help
Some card issuers have made it easy for subprime customers to get approved for a credit card. Capital One offers fantastic options for customers looking for simple ways to build credit.
If you have a low credit score, attaining any line of credit, including an installment loan, can help you rebuild your score. Spring Financial offers personal loans up to $35,000 for Canadians facing all types of credit situations. Take a couple of minutes right now to fill out the free online application form to see what you could be approved for!
