The Benefit of Charge Cards vs Credit Cards
Posted On June 8, 2014
Although a charge card can be used the exact same way as a credit card when making purchases, many financial experts recommend a charge card as a better cash management solution. Unlike a credit card, where you can accrue an outstanding balance and pay it off over time, a charge card must be paid off in full at the end of each month.
This eliminates the biggest danger of a credit card: high interest rates. The current average interest rate for credit cards in the UAE, according to bayzat.com, is 34.15% (this equals 2.85% per month!). If you spend AED 1,000 on a credit card, and only make the minimum monthly payment (for example 5% of the credit card balance), at the end of the first year you would have made AED 523 in payments. Of this amount, AED 304 would have been interest, while only AED 219 actually went to paying off the AED 1,000. This means you would still have AED 770 outstanding on the credit card (note unpaid interest is also added to the principal balance at the end of each month).
On the other hand, with a charge card, you would have to pay the entire AED 1,000 at the end of the month. So what is the purpose of a charge card? It is a useful tool for short-term cash management. For example, if you need to pay a bill in the middle of the month but do not have the cash to do so since your salary is paid at the end of the month, you can use a charge card to pay the bill. On the payment due date, you have to pay off the entire AED 1,000, thereby eliminating any urge to keep rolling the amount over each month by making only the minimum monthly payment.
Charge cards do not have an official credit limit; they use what is known as a shadow limit. This is the maximum spending limit, which may actually change over time based on your spending habits. Since there are no interest payments on a charge card, the financial institution makes money by charging an annual fee. As with a credit card, attractive rewards programs are also offered with most charge cards. While the retail market for charge cards in the UAE is very small, many businesses prefer them to credit cards.
American Express is the main provider of charges cards in the UAE. For those who are worried about falling into credit card debt but want the luxury of being able to use plastic, a charge card is the way to go.
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