Business charge cards and debit cards may be similar, but knowing when to use each can become a strategic decision for growing your construction company.
Let's clarify some common misunderstandings about when to use each by first defining both types of cards and then highlighting their similarities and differences.
What is a Business Charge Card?
A business charge card allows you to make purchases with borrowed money, similar to a credit card, that you must pay back in full each month.
The lender gives you the line of credit on the condition that the balance is paid fully when the billing cycle ends, so you cannot carry it over.
A billing cycle usually ranges from 30 to 45 days. Any charge you make during this period will be added to your previous balance and determine your statement balance when each billing cycle ends.
Businesses often use charge cards to make purchases because they track their spending more quickly while also helping them build a solid credit history.
Charge cards work just like regular credit cards and are often confused with them. Charge cards, however, require you to pay the entire balance once you receive the bill. And like many other credit providers, charge cards consider your spending pattern, payment, and credit history. Therefore to qualify for one, you'll need healthy business finances.
The Toolbox charge card is an example of a charge card suited to contractors and the construction industry. This particular card has no annual fee, no interest like a credit card, and doesn't require a credit check or personal guarantee. Instead, the strength of your business financials sets your credit limit.
What is a Business Debit Card?
Business debit cards allow customers to spend money by drawing on funds they have already deposited in the bank. The cards are linked to customers' checking or savings accounts and can be used to withdraw cash, make purchases, or pay bills.
Debit cards have always been popular. A study by the Federal Reserve finds that debit cards are now the most common type of payment card, surpassing credit cards.
Banks usually offer them when you open an account, so you have many options to choose from. Examples of debit cards are Visa and Mastercard.
With a business debit card, you are not making purchases with borrowed money. Instead, the bank deducts money from your account when you make purchases.
Therefore, debit cards attract no interest and can't affect your credit score.
If your account doesn't have sufficient funds, the bank will either decline the transaction or charge your card with overdraft fees, depending on the account type.
And since you can only spend money you own, debit cards are ideal for businesses and people struggling with overspending and who want to avoid debt or excessive fees.
Debit cards are flexible, convenient, and suitable for daily transactions. And while they do not have rewards, debit card fees are considerably low.
Debit Card vs. Charge Card: Similarities
Commercial banks and other financial institutions offer debit cards and charge cards, but this isn't the only feature they share. Some of their other similarities are:
- Access to funds: Debit and charge cards are common ways to access funds to purchase goods and services. With business debit cards, you only access money you have available in your bank account from client payments or revenue; charge cards allow you to expand your access to funds without going into credit card debt.
- Access to cards: Debit and charge cards have a 16-digit card number, expiration date, and the cardholder's name on the front. They also possess a card verification code (CVC). The CVC is a three-digit or four-digit number at the back of charge and debit cards that authorize internet or mobile purchases. With both, you can request cards for you and your crew.
- Access to online purchases: Debit cards and charge cards are fast and convenient. Both of them can safely shop online and make payments on websites supporting payment cards. You can also withdraw cash with debit cards at ATMs, giving you access to funds anywhere.
- Access to convenience and security: They both offer consumers convenience and security. Debit and charge cards are accepted at millions of locations worldwide. In addition to the fraud protection they offer, they have a personal identification number(PIN). This pin is assigned or chosen by each cardholder.
- Interest-free: They are interest-free. Debit cards do not provide credit. As a result, they don't incur any interest. And even though charge cards like the Toolbox charge card provide credit, they attract no interest or fees when balances are paid on time.
Charge Card vs. Debit Card: Differences
Charge cards and debit cards let you pay for things, yet they are not the same. Here are their differences:
- They process transactions differently. A debit card immediately transfers the funds from your bank account when payments are made. While a charge card lets you buy things on credit and pay them back at the end of every billing cycle.
- Charge cards don't have spending limits, but debit cards do. Charge cards provide unlimited access to money and are very useful in emergencies. With a debit card, you can only spend as much money as you have in your account.
- Your business financials do not determine whether or not you qualify for a debit card. However, banks factor in your credit score when deciding whether they want to give you a charge card or not. Although, the Toolbox charge card does not require a personal guarantee or credit check.
- Debit cards help you to manage your spending easily by allowing you to spend only what you have deposited in your account. Charge cards, on the other hand, provide access to no-interest lines of credit but can be a wrong choice for those who can't pay their full balances every period.
- Debit cards do not affect your credit score since your spending pattern or payment history isn't recorded. In contrast, charge cards can affect your credit history. All charge card transactions and payments are reported to credit bureaus. So failure to pay up your balance is damaging to your credit score.
- Finally, debit cards charge fees on foreign transactions, monthly maintenance, overdrafts, and ATM transactions. Meanwhile, cards like the Toolbox charge card would only charge a fee if the monthly statements are not paid as promised.
Summary Table of Difference: Charge Card vs. Debit Card
Header 1 Header 2 Header 3 Types of Purchases It allows you to pay for things with funds directly from your bank account. It lets you buy things with credit and pay later. Spending Limits You can only spend what is in your bank account. It has no preset spending limit. Required Credit Score It does not require a good credit score. It requires an excellent credit score. Credit History It has no effect on your credit history. It can affect your credit score. Rewards & Benefits Only a few debit cards offer rewards Most charge cards provide rewards and benefits. Annual Fees They do not charge annual fees. Charge card providers charge high annual fees. Overdraft Fees Overdraft fees are high Overdraft fees are lower.
The Benefit of Using a Charge Card Over a Debit Card
There are several advantages to using a charge card. Some of these are:
- A business charge card can help you to build your business credit score. A high credit score means you'll be eligible for better interest rates on business credit cards and business loans in the future, so using a charge card is a great way to start building your credit history.
- A charge card can be a great way to avoid overdraft fees. You will be charged overdraft fees if you have a debit card and accidentally spend more than you have in your account.
- There are many perks and rewards associated with charge cards, including statement credit, purchase points, travel benefits, and cash back. The Toolbox charge card includes a free spend management platform and unlimited cards.
- A charge card can also improve the cash flow of your business. Its versatility makes it suitable to cover day-to-day business expenses and large purchases. You can't always get this with debit cards.
Charge Card vs. Debit Card: Which Should You Choose?
It is essential to consider the needs and goals of your business before taking any step. Whichever card you use, ensure you look around for the best deals, and don't forget to read all the terms.
If you're not looking to grow or expand your business, or take on multiple projects at once, you can easily use a debit card to only spend the money you have in your account for project materials and supplies.
However, charge cards are a better option if you're trying to build your business, and as a business entity, you stand to gain more from charge cards if you use them properly. In addition, you'll enjoy amazing rewards, spend tracking benefits, and better fraud protection.
If you are a growing construction company, consider the Toolbox charge card. Unlike other charge cards, it does not require a credit check or personal guarantee. You can apply online for one now and get approved within 24 hours.