Lawrence Chui, PhD, a certified public accountant and associate professor of accounting at St. Thomas University’s Opus College of Business, appeared in an Ask the Expert column on personal finance website WalletHub to discuss habits spending and charge cards versus credit cards. The conversation is reproduced below with permission.
What types of people should consider getting a charge card?
Unlike a credit card, there is no absolute spending limit on a charge card. Payment cardholders will have to pay their balance in full every payment cycle or face hefty late payment penalties. Business owners may consider getting a charge card as it offers more flexibility in terms of spending limits compared to a credit card. People who are motivated to pay their balance in full might also consider getting a charge card. Also, there is no credit usage for payment cards. High credit utilization could negatively impact the cardholder’s credit rating. People who are disciplined in paying off their balance in full and who regularly spend near their credit limit should also consider getting a credit card.
Do you think payment cards are effective in promoting disciplined spending and payment habits among users?
In short, yes. Charge cards can be effective in promoting disciplined spending and payment habits among cardholders. Unlike a credit card which offers cardholders the option of making a minimum monthly payment, charge cardholders will be subject to 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 funding functionality?
This will depend on the cardholders’ needs. 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 with each payment cycle, there will be no interest charges. If cardholders are looking to have a revolving limit with the option of not paying off their balance in full with each payment cycle, a credit card would be a better option.
Should a credit card offer better rewards and charge lower fees to compete with standard rewards credit cards?
Not necessarily. The charge card offers cardholders something they can’t get with standard credit cards: no preset spending limits. Payment cardholders also don’t have to worry about credit usage and its impact on their credit score.