Our writers and editors used our in-house natural language generation platform to help focus parts of this article and add especially helpful information. The article was reviewed, fact-checked, and edited by our editorial staff before publication.
Charge cards are a useful tool for managing your finances and building credit, but they are often misunderstood and underused. Unlike credit cards, charge cards require you to pay off your balance in full each month and have no preset spending limits.
While this unique feature has benefits and can help improve your credit score, charge cards aren’t for everyone. Whether you’re new to charge cards or are considering adding one to your financial portfolio, it’s important to understand the difference between credit cards and charge cards. In this article, we’ll explain what a charge card is, how it differs from a credit card, and the pros and cons of using a charge card.
What is a charge card?
Charge cards must be paid in full every month. Unlike credit cards, charge cards do not have a preset spending limit. Instead, purchases are approved based on your spending and payment history, financial resources, and credit record. Charge card balances must be paid in full by the due date, so there are no interest rates or minimum payments. If bills are not paid on time, you may incur late fees or other penalties, depending on your card agreement.
Many charge cards offer welcome bonuses, travel rewards, and other perks, but some features are only available on credit cards. Unlike charge accounts, credit card accounts have a credit limit and allow users to carry a balance at an agreed-upon interest rate. That’s why when you look at credit cards, you’ll only see introductory 0 percent APR offers.
Some charge cards offer the option to defer part of your debt. For example, American Express offers qualifying cardholders a flexible payment service that allows them to pay off certain transactions in installments. Because interest is charged on carried-over balances, charge cards are best suited for those who are prepared to pay off the full amount each month.
How do charge cards work?
Charge cards and credit cards are the same in that you swipe or insert the card when making a purchase. However, you should get into the habit of paying your charge account balance in full each month. Forgetting to pay a large balance can cost you dearly. There are late fees for payments past the due date, usually around 3%. So, a late payment on a $5,000 credit card payment can cost you a minimum of $150.
Consumers who use charge cards often use them in conjunction with traditional credit cards, and having both has its benefits: Choosing the right card for each purchase can help you earn points faster, and spreading out your spending can help keep the balance from growing too large on either account.
Charge cards are a great option for people looking to make big-ticket purchases because they don’t have a pre-determined spending limit, but to enjoy this luxury, cardholders must maintain a good credit history, as credit card issuers will closely monitor spending beyond the limit.
How do charge cards affect your credit score?
Whether you use a charge card or a credit card, your payment history is reported to three credit bureaus: Equifax, Experian, and TransUnion. With a charge card, responsible habits can help boost your credit score, but the impact is different than with a typical credit card.
Charge cards count towards certain components of your credit score, such as your payment history and the length and depth of your credit history. If you use the card as intended and pay off your balance in full each month, charge cards can help you build habits that will help you earn a good credit score.
The impact of charge cards on your credit score gets a bit more complicated when it comes to credit utilization, or the ratio of revolving account debt to available credit: This factor accounts for 30 percent of your FICO credit score (and 23 percent of your VantageScore rating).
Charge cards aren’t revolving accounts with ongoing balances, and they don’t have credit limits, so charge card balances may be excluded from utilization in the latest versions of VantageScore and the FICO scoring model. “We believe that most of the scores in use today exclude charge cards from utilization,” says Barry Paperno, former consumer operations manager at myFICO.com.
Therefore, a high balance on a charge card doesn’t affect your credit utilization ratio, and can be a credit score savior if you need to make a large purchase. For example, if you plan to spend $10,000, a charge card can help you avoid the negative consequences that could come from making that purchase on a credit card with a $12,000 limit.
Which issuers offer charge cards?
Most financial institutions are phasing out charge cards and focusing on credit cards. American Express is one of the few major credit card providers that offers cards with flexible spending limits, such as the Platinum Card® from American Express and the American Express® Gold Card. However, some argue that these are no longer true charge cards because you can now carry a balance using the Pay Over Time feature. Another charge card still on the market is the Capital One Spark Cash Plus, a business credit card.
Charge cards and credit cards
The terms “charge card” and “credit card” are often used interchangeably, but as you know, there are some key differences.
- Spending Limit: Although charge cards do not have preset spending limits, this does not mean that spending power is unlimited. Instead, the limits are dynamic and adjust to reflect the customer’s perceived spending ability.
- interest: Charge cards must be paid in full each month, so no interest is charged.
- Late fees: Instead of charging interest on unpaid charge card balances, you will incur a late fee, usually equal to a percentage of the past due amount.
If you can pay off your balance in full, there isn’t much difference between the two types of cards, but a charge card may give you more spending power. Top-tier credit cards offer a wide selection of rewards, flexibility in how you spend, and low annual fees. However, for those who want to avoid interest, earn high rewards, or spend a lot, a charge card may be the right choice.
Want to see if you can pass pre-qualification without impacting your credit score? Check out our CardMatch feature to find the card that best suits your needs.
Conclusion
While traditional cards may be a better option for those new to credit cards, charge cards offer their own benefits and can have a positive impact on your credit score if used responsibly. However, before you decide which one to apply for, it’s important to understand the difference between charge cards and credit cards.
Charge cards do not have a preset credit limit and do not charge interest, but they do require payment in full each month and may incur late fees for late payments. Also, be aware that not all credit card issuers offer charge cards, and American Express is one of the few that do. — However, many of their cards are not considered true charge cards.
In the end, the key is to carefully consider your spending habits and choose the card that best suits your needs. So whether you choose a credit card or a charge card, use it wisely to build a strong credit history and reach your financial goals.