Credit card vs. charge card: what’s the difference?

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Do you know what a charge card is? While a charge card and a credit card are often thought to be similar, they actually aren’t interchangeable terms. A credit card is a type of revolving credit account in which the cardholder is given a spending threshold, and as they pay their debt off, the credit is automatically renewed. In comparison, a charge card has no spending limit and doesn’t charge interest but has to be paid off in full every pay period, usually monthly.

If you need a new card and are deciding between these two types, this guide will help walk you through the credit card vs. charge card comparison. 

What is a credit card?

A credit card is a type of revolving credit account. Cardholders are given a maximum spending limit, which resets as they pay off the charges on the account. Credit cards charge interest on any purchases left unpaid past the due date and sometimes come with annual fees. Many individuals choose their credit cards based on the benefits they may receive, such as cashback rewards, points, vouchers, travel perks, and more. 

You have to apply for a credit card and are approved based on your creditworthiness. Individuals with higher credit often get access to credit cards with better benefits and—sometimes—lower interest rates. Still, there are credit card options available for everyone, including those with bad credit.

What is a charge card?

A charge card isn’t a revolving credit account because it requires the cardholder to pay off the balance in full, usually every month. Charge cards don’t come with credit limits and don’t charge interest on purchases. Many people gravitate toward charge cards because of their perks. However, charge cards often come with very high annual fees and are only offered to those with excellent credit. 

Individuals who don’t pay off their charge card in full by the due date are subject to enormous fees and penalties. 

In recent years, charge cards have become rare, with companies opting to offer premium credit cards instead. 

How do charge cards work?

A card that has no spending limit and charges no interest sounds too good to be true to most. So you might be wondering how charge cards work and what their catch is. A charge card looks like a credit card and acts similarly—in some aspects. You can make purchases on the card and often earn rewards. And unlike a credit card, charge cards typically don’t have a credit limit.

A charge card promises that you’ll avoid paying interest on purchases. But charge cards require the balance to be paid in full by the due date or there are significant consequences. Failure to pay on time incurs tremendous fees and penalties and often results in missed payments being reported to the credit bureaus. 

Lastly, since charge cards aren’t made to carry a balance (unlike credit cards), 0 percent interest promotions, minimum payments, and balance transfers are never offered.  

Charge cards used to be very popular with retailers, but now most stores have replaced this option with credit cards instead.

Key differences between credit cards and charge cards

Here are some of the primary differences between credit cards and charge cards.

Spending limits

A credit card has a maximum spending limit and usually stops working if you exceed that limit. In fact, many cards allow cardholders to go slightly above their credit limit but will charge an over-limit fee for doing so. 

In comparison, a charge card has no preset limit. This means you can often spend a lot on a charge card without worrying about your credit utilization ratio. Charge cards are great for big purchases, as you don’t have to worry about meeting or exceeding your monthly limit. Many business owners who frequently make large purchases may benefit from a charge card. 

Not having a preset credit limit doesn’t mean a charge card comes with an unlimited spending threshold. Instead, the limit on your card changes depending on certain factors, such as your payment history, use of the card, creditworthiness, income, debts, and more. 

Payment requirements

The main difference between charge cards and credit cards is the ability to carry a balance. With a credit card, you can maintain a balance from month to month. As long as you pay the minimum payment, your credit card will charge you some interest but allow you to continue using the card and carrying a balance forward. 

A charge card requires the balance to be paid in full (usually monthly). If a charge card isn’t paid in full for its pay cycle, the cardholder will incur hefty fees, the account may immediately be closed and the company may report the missed payment to the credit bureaus. 

In some ways, the inability to carry a balance is an advantage of a charge card. This ensures the cardholder can’t keep spending and accruing a balance while only making a minimum payment. 

Fees and interest

The fees and interest structures for charge cards and credit cards are quite different. Credit cards can come with an annual fee and other fees (over-limit fee, late payment fee, cash advance fee, etc.). Credit cards also charge an interest rate on purchases not paid by the monthly due date. As of January 2022, the average credit card interest rate for Americans was 16.13 percent, but it can go as high as 30 percent.

Charge cards typically have a high annual fee because they offer excellent rewards or perks. A charge card doesn’t charge interest, but there are exorbitant fees for not paying the entire balance every month. In comparison, a credit card won’t charge you late payment fees as long as you make the minimum payment every month. 

Credit score impact

Both credit cards and charge cards can hurt or help your credit. For example, credit cards and charge cards both typically affect your payment history, which is the most important factor in your credit health. On-time payments are beneficial, while late or missed payments can really hurt your credit.

Similarly, both a credit card and a charge card require you to apply for them, which will result in a hard inquiry into your account. A hard inquiry often temporarily lowers your credit score by a few points. However, as long as you avoid multiple hard inquiries in a short period, your credit should recover within six to twelve months. 

Credit cards and charge cards can both also play a role in your credit mix and credit age, two other main credit factors.

When it comes to credit utilization, though, credit cards and charge cards are different. When you have a credit card, you want to avoid using too much of your available limit, as that can negatively impact your credit utilization ratio. But with a charge card, there’s no preset credit limit, so you don’t have to worry about how your purchases on that card will impact your credit utilization. 

Which is the best option for you?

When looking at the credit card vs. charge card debate, there’s no universal answer on which type of card is best. Ultimately, you have to weigh the pros and cons of each option and decide what factors are most important to you.

Someone responsible with their budget might opt for a charge card and take advantage of the rewards, knowing they can keep up with their payments. Alternatively, if you know you tend to overspend, having a preset credit limit and the ability to make minimum payments may be more beneficial. You also have to keep in mind that not many lenders offer charge cards now, so you might not have many options in that vein.

Regardless of the card you choose, it’s essential to be responsible when using credit. When it comes to using credit cards, always remember to:

• Keep your spending to 30 percent or less of the available credit
• Pay your bills on time and in full
• Set up autopay so you never have a missed or late payment
• Spend within your budget

Remember that being accountable with your credit and having healthy credit is essential for your financial health. Excellent credit can save you money and give you access to more financial opportunities when you need them. If you’re concerned about your credit, let Lexington Law Firm help. Our credit repair consultants will review your credit and help you on the credit repair journey. 

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