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

Written by
Maryalene Laponsie
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Is a charge card the same as a credit card?

The terms “charge card” and “credit card” are used so interchangeably that you’d be forgiven if you thought they were the same thing. However, they are most definitely different.

Keep reading and we’ll run through the differences before you accidentally apply for a charge card when what you really want is a credit card.

What is a charge card?

Charge cards and credit cards both let you do the same thing – buy now and pay later – but they are very different animals. So what type of card is a charge card?

A charge card is one that requires you to pay off your balance each month. If you fail to do so, you get slapped with a late fee. If you are late or fail to make a complete payment on more than one occasion, you could see your card quickly cancelled.

What’s more, a significant difference between charge card and credit card accounts is that charge cards don’t have limits. You can spend as much as you want so long as you pay it back at the end of the month.

Advantages of charge cards

Having no preset spending limit is a significant advantage of charge cards. There’s no need to worry about being declined for being over your credit limit, although you need to have self-discipline to avoid charging more than you can comfortably pay back each month.

Rewards programs for charge cards are typically generous, but they also often apply an annual fee that can be hundreds of dollars or more than traditional credit cards. So be sure any rewards points you earn will offset the cost of the card.

Another perk of charge cards is that their balance is not used when calculating your credit score. A major factor in credit score calculations is your credit utilization ratio, which refers to the percentage of credit you use. The higher your balances, the higher your credit utilization ratio.

A high credit utilization ratio can negatively impact your credit score, but charge card balances are excluded from this calculation. That means you don’t need to worry about your charge card purchases negatively affecting your credit score.

Of course, since you’re paying off your balance each month with a charge card, you’ll also avoid expensive interest costs. That can save you money and help you stay out of debt.

How charge cards work

When it comes to making purchases, charge cards work no differently than credit cards. In both cases, you swipe or insert your card at the cash register terminal and follow the prompts to complete the transaction.

Then, you receive a statement in the mail and need to pay the full balance by the due date. Failure to do so could result in a hefty late fee.

Charge cards vs. credit cards: Effects on your credit and other differences

If you are considering a charge card vs. credit card, there are some major differences you need to know.

Credit scores: With both cards, the issuer will likely make a hard inquiry on your credit report as it reviews your application. This can drop your credit score by a few points temporarily.

Both credit cards and charge cards will also report payments to credit reporting companies, and timely payments will help boost your score.

However, the cards are treated differently when it comes to calculating your credit utilization ratio. As mentioned above, the monthly balance on a charge card usually isn’t included in determining your ratio. But the balances on your credit cards are factored into your credit score.

As a result, the card you use could have a large impact on your credit score since 30% of FICO scores are based on the amount you owe. Learn more about the different factors than can impact your credit sore.

Spending limits: A benefit of charge cards is that you don’t have a preset limit. So long as your account is in good standing, you can spend as much as you want each month.

That isn’t possible with credit cards that come with a limit that is typically based on creditworthiness. Some cards will let you spend over your limit but expect to pay a fee if you do so.

Monthly payments: With few exceptions, a charge card requires you to make a monthly payment equal to all purchases made during the billing cycle. If you fail to do so, your ability to use the card may be limited.

Credit cards, on the other hand, allow you to carry a balance month to month. You’ll pay interest on the balance but so long as you are making monthly minimum payments on time, you can keep on spending until you hit your credit limit.

Fees: There are fees attached to both credit cards and charge cards. With charge cards, expect to pay an annual fee and, if you fail to make a full payment, a late fee.

Credit cards may or may not charge an annual fee. They also have late payment fees, over the limit fees and charge interest on balances after a grace period. However, some cards have introductory periods in which no interest is assessed.

Issuers: Numerous banks and credit unions issue credit cards, but there are significantly fewer options for charge cards. In fact, the only true charge cards offered nowadays come from Diners Club and some fuel companies.

American Express also has charge cards, but the company has introduced a Pay Over Time feature that lets people repay eligible purchases over several months. This allows cardholders to carry a balance as they would on a credit card.

How to choose between credit cards and charge cards

By far, most of the products offered today are credit cards rather than charge cards, and credit cards typically meet the needs of most consumers. However, you may want to consider a charge card if you are able to pay off your balance each month.

For those who are financially secure and want the flexibility to be able to charge as much as they like, a charge card can be a good option. It may also provide some extra perks and rewards not available with a credit card.

Charge cards may also make sense for those who have business expenses that are reimbursed each month. Since these costs can vary month to month, charge cards are a convenient way to spend whatever amount is needed while earning significant rewards points. Frequent travelers may also find charge cards make the best travel rewards cards.

While it may seem like splitting hairs to distinguish between a charge card and a credit card, the two operate in different ways. While traditional charge cards are relatively rare nowadays, before you apply for your next card, take a moment to double check that it is actually the type of card you want.

Maryalene Laponsie
Cardratings Contributor

Maryalene is a freelance contributor to CardRatings.com and specializes in personal finance topics such as credit cards, budgeting, saving and investing. She has written professionally for nearly 25 years and is a regular contributor to U.S. News & World Report, Money Talks News,...Read more

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