Charge Card vs. Credit Card: What are the Differences?
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Summary:
Although charge cards and credit cards look very similar, there are some key differences. Concepts such as spending limits and balance pay-off requirements differ substantially. The way that charge cards and credit cards interact with your credit score and profile are also unique to each type of card.
Although most individuals will be familiar with the concept of credit cards and debit cards, they might not be acquainted with “charge cards.” Charge cards aren’t as common as they once were, but you’ll still see them occasionally. In fact, depending on your spending habits, they might be something to consider.
Charge cards are similar to credit cards in that you are spending money that is not directly pulled from your bank account like a check or debit card. However, unlike credit cards that enable you to roll the balance over and make a monthly minimum payment (including interest charges), charge cards force you to pay the balance in its entirety each month. Due to this requirement, unlike credit cards, charge cards often will have a much greater spending limit or no spending limit at all.
Although much more rare these days, charge cards used in conjunction with other credit-inducing products and activities can help improve your credit score.
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Credit cards 101
Most people have at least one credit card in their wallets. Here are some of the features of a typical credit card you may or may not be aware of.
Spending limit
Credit cards will typically have a maximum spending limit or credit limit. This is the maximum amount you can spend before you pay your balance off. A credit card for an adult (and not a student) will usually start at a nominal amount like $2,000.
Once you have consistently proved your creditworthiness, you can obtain credit cards for an increased limit amount. Of course, the credit limit depends on whether your card is a personal or business credit card, as business cards will likely have a much higher limit.
Interest and debt
A credit card company’s ideal client is one that does not pay his balance off right away. Instead, they meet the minimum monthly payments, and the rest is turned into debt with interest payments.
The interest that they charge will be defined by the credit card’s APR, which is the annual rate of interest being charged to the borrower on their debt. A credit card issuer makes money by having the customer pay interest on the money borrowed through credit.
Payment terms
Most credit card issuers require a minimum payment each month that is part of their overall balance. For instance, let’s say you have a credit card with a maximum limit of $2,000, and you spend all the $2,000. You won’t need to pay all of the $2,000 that you borrowed the next month. Instead, you’ll only have to pay off a portion of the $2,000, such as $200 (10%), to maintain your card and good standing.
Late fees and annual fees
As credit cards only make you pay a portion of the balance upfront, the late fees are minimal and are easily avoided. Furthermore, most credit cards do not have annual fees attached to them. Instead, the primary way of making money for credit card companies is by charging you more debt and interest.
Looking for a credit card without any annual fees? Look no further than some of the options below.
Rewards and perks
Credit card companies want to encourage spending on their cards. To accomplish this, they offer a variety of perks and rewards, such as cashback rewards or airline miles. While this is a great incentive to spend money using a particular card, don’t forget that you have to pay back that money. The more you spend, the more debt you accumulate, which may not be worth the extra rewards.
If you’re looking to get the most out of your rewards, consider some of the following rewards credit cards.
Charge cards 101
Although charge cards are more uncommon than credit cards these days, they still exist. Here is how they differ from credit cards.
Spending limit
With charge cards, in many cases, there is no spending limit. If you want to spend $100, or $5,000, it should have no effect on your charge card being accepted.
However, be aware that this has to be in reason. The card issuer may still have some sort of ceiling as to how much you can spend when using your card. That being said, it’s much more fluid than a hard credit limit with a credit card.
Interest and debt
With charge cards, there is no debt accumulated after one month and, therefore, no interest. This primarily has to do with the payment terms, which we cover below. With charge cards, there is no need to worry about what the APR is, as it’s a moot point.
Payment terms
Charge cards require the user to pay their balance off in its entirety every month. This stands in stark contrast to credit cards, which only require a portion of the balance to be paid off every month. If you spend $2,000 on your charge card, you must pay off the full $2,000 when your monthly invoice comes due.
Pro Tip
Some charge cards will actually offer the option of having the user pay over time, and not all due at once. American Express, for example, offers an extended payment option (ExPO) that allows users to pay for purchases over $200 over time. However, it’s important to note that this is the exception and not the general rule.
Late fees and annual fees
On a charge card, late payment fees generally will be higher than on a credit card should you fail to pay off the required balance in time. In many cases, these cards will have an annual fee for the privilege of using them. American Express Gold and Platinum charge cards, for example, have high annual fees that will range from $250 to $695 per year.
Rewards and perks
Charge cards will offer rewards and perks just like credit cards, especially if they are used for travel. In fact, charge cards initially offered better rewards than credit cards, but nowadays it’s more or less on even ground.
If these differences sound better to you than the terms offered by credit card issuers, consider getting one of the charge cards listed below.
Charge card vs. credit card
Below is a breakdown of the main similarities and differences between charge cards and credit cards, as we covered above.
| Credit card | Charge card |
|---|---|
| • Preset spending limit | • Typically no preset spending limit |
| • Interest accumulates based on the unpaid balance | • No interest accrues |
| • Required to make minimum monthly payment, may pay more | • Required to pay entire balance off at the end of the period |
| • Not all cards have annual fees, late fees are pretty low | • High late and annual fees |
| • Offer reward points | • Offer reward points, especially when used to make travel purchases |
Charge card vs. credit card: How do they impact credit scores?
Although you typically have to pay the entire bill at the end of the month, you’re still spending money that you don’t have in the form of credit. Because of this, using either a credit card or a charge card will impact your credit history and credit score.
Obviously, paying your balance or total bill in full every month will improve your credit score, whether it’s through a charge card or credit card. This is all calculated in your payment history, which affects your credit score. The only major difference is how the three major credit bureaus look at your credit utilization rate when measuring a charge card vs. a credit card.
A credit card utilization rate is how much of your credit card limit you typically use and have on your balance sheet. The lower your credit utilization ratio, the better (as long as the card is kept active). Try to keep your credit utilization ratio in single digits to minimize the chances of it hurting your score. As charge cards, in most cases, do not have a spending limit, they do not factor in your credit utilization ratio. This means that purchases you make with a charge card are unlikely to affect your credit score as long as you pay the balance before it is due. So, you can be strategic by having both charge and credit cards but using your charge card when you have to make large purchases that could push your utilization rate into double figures.
FAQs
What is better, a charge card or a credit card?
It depends on the situation. For a business in which their employees need to spend a lot of money at once, a business charge card can help. However, there aren’t a ton of options when it comes to charge cards, and many will have higher annual fees.
Is Amex a charge card or credit card?
American Express offers both charge cards and credit cards for individuals and businesses.
Can you build credit with a charge card?
Yes, you can build credit with a charge card by making timely payments, just as you would with a credit card.
Does a charge card have a limit?
Yes and no. They typically don’t have a preset spending limit, but you usually can’t charge an infinite amount to the card and hope it gets approved.
Key Takeaways
- Charge cards differ from credit cards in the interest charged, the spending limit, the payment terms, and the fees and annual charges.
- Unlike credit cards, charge cards often don’t have a preset spending limit. However, these cards may have a maximum amount you can ever spend at one time.
- Charge cards and credit cards can both impact your credit score if you don’t make your payments on time. But if the charge card doesn’t have a credit limit, it will not impact your credit utilization ratio.
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