Credit card vs. charge card: What's the difference?

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Credit card vs. charge card: What's the difference?


Many people use the terms "charge card" and "credit card" interchangeably. You can use a credit card and a charge card to make a purchase in a similar manner. Plus, the cards often look similar, which may be why some people confuse the two.

However, there are key differences between the two, and you may want to compare the two types of cards before deciding which is a better fit for you.

Here are the primary differences between a charge card and a credit card.

You must pay a charge card's bill in full each month.

When you use a charge card, the total balance is due each month. You may need to keep a close eye on how much you spend to be sure you can pay the bill.

With a credit card, you can make a minimum payment equal to a small percentage of the balance on the card and "revolve" the rest of the balance to the next month. This can make managing expenses easier, but you'll usually have to pay interest on the unpaid portion of the balance. And this interest rate can be substantial -- according to December 22, 2015 data, the national average credit card APR is 14.99 percent.

Charge cards don't have a preset spending limit.

When you receive a credit card, you'll be assigned a credit limit, or the total amount you can spend. If you reach your credit limit, the card may be declined. Some issuers let you opt-in to be able to spend more than your credit limit, but there may be a fee for doing so.

Charge cards don't have preset spending limits, but the issuer may still limit how much you can spend with the card. You can find out what the limit is when you first receive the card, but it may change based on your payment history, credit, income, debts and other risk factors as determined by the issuer.

Late payments may be more expensive on charge cards.

If you don't pay a charge card's bill in full, you may have to pay a late-payment fee. For example, the American Express Gold Card charges $38 the first time you're late with a payment. If you don't pay for two billing periods in a row, the fee may be the greater of $38 or 2.99 percent of the amount due.

Credit cards also can charge late-payment fees, but you can avoid them by paying the minimum amount on time. As of January 1, 2016, the CARD Act caps late-payment fees on credit cards at $27 for a first occurrence and $37 for subsequent late payments during the next six months.

Michael Bovee, credit expert and founder of Consumer Recovery Network, says that he often sees charge card providers closing accounts or pausing privileges immediately if you miss payments, but credit card issuers will sometimes offer a longer grace period.

Charge cards generally have an annual fee.

Most charge cards have an annual fee of at least $95, although it may be waived the first year. The fee is partially because charge card issuers don't make money on interest payments like credit card issuers. Some credit cards also charge an annual fee, but there are also many no-fee cards. Like charge cards, some credit cards waive the fee for the first year.

There are more credit card issuers than charge card issuers.

American Express is the primary charge card issuer in the United States, although it also issues credit cards. In contrast, you may be able to apply for a credit card from many different financial institutions or stores. Credit cards with a Visa or MasterCard logo are also accepted by more retailers in the U.S. than American Express charge or credit cards.

Unauthorized transactions are treated similarly.

Matthew Katz, CEO of chargeback prevention company Verifi Inc., says that for consumers, there's little difference between a credit card and a charge card when it comes to fraudulent activity. "In general, if a consumer's payment information is stolen, they have no liability," Katz says.

Under federal law, you may be liable for up to $50 for unauthorized charges made with your credit or charge card. In practice, many major card issuers offer zero-liability protection.

Charge cards vs. credit cards: Effects on your credit

Both charge cards and credit cards can help you build your credit, but there are differences between the two.

  • Inquiries. When you apply for a charge card or a credit card, the issuer may review your credit profile with a hard inquiry. A hard inquiry may remain on your credit report for up to two years, but the effect is minor and may pass within a few months.
  • Utilization. Credit card utilization is a significant factor used by credit scoring agencies to determine your credit score. With a credit card, your utilization rate is determined by comparing your statement balance to your credit limit. If you have statement balance of $100 and a credit limit of $1,000, your utilization rate is 10 percent. A lower utilization rate is better for your credit. Some older credit scoring systems, which may still be used by lenders, use a charge card's historically highest statement balance as if it's a credit limit to determine a utilization rate. Newer scoring models don't include charge card activity when determining utilization rates.
  • Payments. Making on-time payments for charge cards and credit cards can help you build a strong credit profile. Payments over 30 days late are usually reported to the credit bureaus where they can stay on your credit report for up to seven years and may affect your credit score, access to credit, and the interest rates on your credit lines.

Bottom line

Credit cards offer you the flexibility of a minimum payment, but the same feature may become a problem if you start to accumulate debt and interest charges. Charge cards must be paid off in full each month, but if you can't make a payment in full, the card may be closed and you'll have to pay a fee. You can use either type of card to build credit by making consistent on-time payments.

About the Author: Louis DeNicola is a personal finance writer and educator. In addition to being a contributing writer at Credit Karma, you can find his work on MSN Money, Cheapism, Business Insider and Daily Finance. When he's not revising his budget spreadsheet or looking for the latest and greatest rewards credit card, you might spot Louis at the rock climbing gym in Oakland, California.

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