What is the difference between a charge card and a credit card?

It’s not uncommon for General Contractors or Construction companies to use corporate cards for business purchases and for funding their projects. However, most small business owners are often confused about whether to use a charge or credit card.

On the surface, they sound the same, but they have unique features and benefits that make them distinct.

Here, we’ll give you a basic overview of what charge cards and credit cards are, their differences, and how you can get the most out of them for your construction business.

What is a Credit Card?

A credit card is an electronic payment card that offers customers access to credit, allowing them to buy resources, make cash advances, and transfer balances. Most consumers and business owners are familiar with credit cards. They are everywhere.

Unlike debit cards, charges are made against a Line of Credit (LOC) rather than cash deposits at the bank. As a result, the credit limit varies from one cardholder to another.

Credit card holders must pay a minimum fee at a prescribed time and roll over other debts with the condition that such debt is repaid in the future and with interest.

In this sense, credit card holders revolve the unpaid credit balance to the following months and pay over time in a revolving balance.

A revolving balance is the portion of your spending credit that is unpaid at the end of a billing cycle. It is associated with revolving accounts - which are credit accounts that allow borrowing of funds and incurring debts charged to the account.

Credit cards are the most common type of revolving account.

Revolving accounts do not demand that you pay the debt in full every month. However, if you don’t pay the entire balance, then interest is calculated and added to your credit balance.

What is a Charge Card?

A charge card is a unique type of credit card that requires you to pay off your balance in full every month.

The billing cycle is usually monthly (30 days) depending on your issuer and how you use the card.

It works like a credit card allowing a user to make purchases without immediately debiting their bank account balance.

A key difference is that while a credit card permits carrying over accrued debt to subsequent months, a charge card requires full payment of the accumulated debt at the end of each billing cycle.

Also, charge cards are not as popular as credit cards. However, they have several useful features that still make them very worthwhile with the correct application.

What are the Similarities Between Charge Cards and Credit Cards?

Credit cards are often mistaken for charge cards. This is because, at a glance, they share similar features.

However, there are also several differences between charge cards and credit cards that can help you choose which one better suits your needs.

Construction companies need to be able to tell them apart as they have certain advantages that may benefit users depending on their business level.

1. Rewards:

Both cards allow you to earn rewards when you consistently spend and repay your card balance. These rewards are usually in the form of points, miles, cashback offers, and travel benefits. The rewards offered vary from one card provider to another.

2. Credit History:

Credit card and charge card issuers consult your credit history before approving you for a new LOC (Line of Credit) or higher spending limit. In addition, whichever card you use is usually reported to credit bureaus (usually Equifax, TransUnion, or Experian). This credit history assesses your ability to qualify for more or new credit in the future.

3. Effect on Credit Score:

Your payment history on either your credit card or charge card will be reported to the credit bureaus. There, it’ll be considered in the calculation of your credit score. The credit score is a gauge of your credit and is used to assess your creditworthiness.

What are the Differences Between Credit cards and Charge Cards?

1. Payments:

A credit card only requires you to pay a minimum amount of your credit balance at the end of your billing cycle. Any unpaid balance is used to calculate your interest fees, which are then added to your credit card bill.

On the other hand, a charge card requires that you pay off your balance in full at the end of your billing cycle.

2. Interest and Fees:

With credit cards, you have to pay interest on the unpaid portion of your balance unless they come with an introductory 0% APR offer, which can cover as much as 21 months of interest-free payments.

On the other hand, charge cards do not charge interest. But any default in full payment of your balance will result in a penalty (usually a late-payment fee or card suspension).

For example, a charge card company can demand a late payment fee of 3% on $6000. It amounts to $180, which is a considerable amount for a penalty.

Also, charge card issuers typically require you to pay an annual fee that could run into hundreds of dollars, while most credit cards don’t charge any yearly fees.

3. Effect on Credit Score:

Your credit card limit is a factor that can affect your credit score. In addition, how you use your credit affects something called your credit utilization ratio - a component for calculating your credit score.

If you are spending too close to your limit, it increases the minimum balance you must pay monthly.

The absence of a spending limit on charge cards means that it is not considered for your credit utilization ratio.

4. Credit Score Requirement:

Credit card companies can still issue you a card even if you have a bad credit score.

Charge cards such as those from American Express have strict requirements, where you will typically need to have a good-to-excellent credit score.

We at Toolbox identified this as a gap where many new contracting businesses would be left out due to their limited credit history. Toolbox doesn't require any personal credit pull to offer companies a charge card

5. Availability:

Credit cards give you a variety of options to pick from. In addition, hundreds of credit cards offer different perks that you can take advantage of according to your financial needs.

With charge cards, there are limited options for each industry. Fortunately, there are some companies that offer charge cards with features particularly beneficial for construction companies.

The Benefits of Using a Charge Card Over a Credit Card

While charge cards have become old-fashioned with more people adopting credit cards, they maintain a base level of usefulness that gives them an edge over credit cards. Some of these comparative advantages are:

1. Build Better Payment Habits:

Using a charge card over a credit card encourages you to pay off your full balance at the end of the month or billing cycle.

This is great for any business as consistently paying your charge card balance monthly is beneficial in more ways than one. Firstly, It allows your business to adapt to a disciplined pattern of payment that can translate to other aspects of your business.

Because your history of payments is consulted in calculating your credit score – a solid track record of regular payments will increase your business’ credit score. Moreover, a solid credit score automatically improves the operating standards of your company.

2. Improve Your Cash Conversion Cycle:

Most construction companies incur a lot of upfront costs because they are usually funded to get the projects started. Then at a later date, they collect payments from their customers. This, in turn, lengthens their cash conversion cycle.

Even though this is common practice, it significantly affects your cash flow. One of the leading causes of business failures in most industries including construction is poor cash flow.

A charge card helps free some of that cash flow, and thus improve the cash conversion cycle.

3. Avoid Debts and Interest Charges:

With a credit card, rolling over or revolving a portion of your unpaid balance to the next month accumulates your business’ balance like a debt. Your business may also incur interest charges on the part of its balance that is unpaid.

Charge cards work differently —they make it impossible to carry over any balance. For instance, Toolbox charge cards have 0 interest rates or any additional fees.

4. Great Source of Short-Term Cash Flow:

A longer billing cycle makes charge cards a perfect source of short-term cash flow for your company.

In addition, you can use a charge card to make payments for significant expenses in the meantime before you receive additional funding on a project you’re working on.

5. Build Stronger Trade Credit:

Because your credit utilization ratio and history of payments are consulted in calculating your credit score, a solid track record of regular payments will increase your credit score. And so will spending below your credit limit.

But it is much more complicated to build a strong credit score with a credit card. Any spending above 30% of your available credit can hurt your credit utilization ratio. Even though you are allowed to, constantly pushing back payments reflects poorly and can affect your credit score.

You generally don’t have to worry about using a charge card since you pay your entire monthly balance and have no spending limit you need to adhere to.

Should You Choose a Credit Card or a Charge Card?

Both credit cards and charge cards have their unique benefits; which we've covered in-depth in this article.

Having a credit card has benefits, such as accumulating points that can be redeemed for purchases down the line. They also help you build a relationship with your local bank since most issue credit cards when you open a new business account with them. This relationship history might be helpful when you need additional funding or business help from your bank.

However, for both new and seasoned construction companies, we recommend charge cards. It is because charge cards help in scaling your business. Mainly where the industry has settled into a reasonably predictable demand and supply cycle.

Companies can order supplies for products where they are pretty confident they will meet their payment deadlines.

Charge cards are ultimately better for construction companies in the following ways:

  • Improve cash conversion cycles by freeing up cash flow for additional 30 to 45 days.
  • Less hassle to get approved compared to traditional credit cards.
  • No interest or additional fees, which once again helps improve the profitability of projects.

Here at Toolbox, we’re committed to helping construction companies scale their businesses with the help of our start-of-the-art charge cards. Apply today to access and unlock additional working capital to help grow your business.