Charge Card

What It Means

A charge card is a kind of electronic-payment card that enables its holder to make purchases on short-term credit granted by the issuer of the card. The two other most common forms of electronic-payment card are the credit card and the debit card.

Although the terms charge card and credit card are often used interchangeably, they are not the same. With a charge card the cardholder is required to pay off the full amount of the balance on the card at the end of each billing cycle (usually one month). By contrast, a credit card allows the cardholder to carry a running balance on the card from one billing cycle to the next, because he or she is only required to make a nominal minimum payment (for example, if a credit card balance is $500, the minimum monthly payment might only be $15). Credit cards offer what is called revolving credit; the running balance on the card is called revolving debt.

A charge card is also different from a debit card. With charge card purchases the card issuer (American Express, for instance) pays the merchant and then bills the cardholder at the end of the month, but debit card purchases are withdrawn directly from the cardholder’s bank account. If adequate funds are not present in the account at the time of the purchase, then the transaction will not be approved.

When Did It Begin

The Western Union Telegraph Company introduced the first consumer charge card in 1914, enabling its customers to charge Western Union purchases to an account and pay later. Department stores and other retail businesses soon followed suit, offering charge cards exclusively for use in their own establishments.

The first multiuse charge card was introduced in 1950, when businessman Frank McNamara (1917–57) and two of his associates founded the Diner’s Club. That year, with an original membership of just 200 cardholders (mostly businessmen who needed to dine out with clients), the Diner’s Club card was accepted by about two dozen restaurants in New York City. The card quickly became a desirable sign of status and buying power, and the Diner’s Club saw exponential growth in the number of its cardholders and participating merchants.

More than half a century later, Diner’s Club remains one of the leading issuers of charge cards in the world, along with American Express (which started providing charge cards in 1958).

More Detailed Information

The difference between a charge card (nonrevolving credit) and a credit card (revolving credit) is significant. By requiring cardholders to pay off the full amount of their balances each month, charge cards essentially force these consumers to live within their means. A cardholder who fails to pay off the full balance at the end of the billing cycle may jeopardize the standing of her account and will likely incur a penalty fee of up to 5 percent of his or her remaining balance. While these terms are rigorous, the great benefit of the charge card it that, because the cardholder pays the balance in full each month, there are no interest charges (fees figured as a percentage rate of the amount owed) and no spending limit imposed on the card.

With a credit card, on the other hand, the cardholder has the option to make purchases far above what he or she can pay off in the course of a single billing period. Meanwhile, the balance he or she carries on the card is subject to interest charges. If the interest rate is high and the cardholder’s minimum monthly payments are low, the interest charges will make the balance continuously increase, and a credit card user can easily become buried under a mountain of debt that will take years to pay off. In 2006 the U.S. Government Accountability Office (the investigative arm of Congress) estimated that the credit card industry was receiving about 70 percent of its revenue from interest on revolving debt and from late-payment penalties.

Credit cards are popular, but for various reasons some people prefer charge cards. Over the decades Diner’s Club and American Express have successfully marketed their cards as symbols of affluence, worldliness, and social influence. Indeed, one of American Express’s best-known advertising slogans is “Membership has its privileges.” In addition to individuals seeking such prestige, government agencies and companies (from small businesses to major international corporations) have also adopted charge cards as a tool of choice for managing expenses and extending spending privileges to employees.

Even though charge card companies do not collect interest payments from cardholders, they still make money. First, most companies charge individual cardholders a hefty annual fee (from $100 to $300) for the privilege of using their cards. More importantly, though, they charge merchants who sell to the cardholders a flat per-transaction fee (about 30 cents) and a “discount fee” (measured as a percentage of the total sale). Credit card companies also charge discount fees, but historically their rates have been significantly lower (about 2 percent for Visa and MasterCard, compared to 4 percent for American Express). Charge card companies justify their higher rates to merchants by pointing out that they deliver more upscale cardholders who make larger purchases.

Recent Trends

At the beginning of the twenty-first century, competition for customers in the electronic-payment industry was fierce. Credit card companies flooded the market with card offers, while more and more consumers became comfortable with carrying a substantial load of revolving debt. Those consumers who did not want to carry debt had the option of paying for purchases immediately with a debit card, which draws money from the consumer’s checking account.

Faced with the challenge of how to remain relevant in this atmosphere, charge card companies maintained their time-tested strategies: rather than trying to be all things to all people, they continued to focus on providing prestige and unparalleled benefits packages to the niche markets they had always served. A niche market is a narrow segment of the population with specialized needs (for example, business travelers).

Benefits packages, also called rewards programs, included premium sky miles (points that a person earns by making purchases on his or her card; these points are redeemable toward the price of an airline ticket), access to restricted airport lounges, guaranteed hotel reservations, and even cash rebates (refunds based on a percentage of the amount a person spends with a particular card).

In addition to competing with each other, electronic-payment cards were also trying to convert consumers to using cards in situations where they normally paid with cash or checks. Thus Diner’s Club sought to broker deals with fast-food merchants, while American Express teamed up with luxury apartment buildings in New York to enable tenants to pay rent with their cards.