Charge card vs. credit card: What’s the difference?

Man looking at his phone to learn the difference between a charge card vs. credit cardImage: Man looking at his phone to learn the difference between a charge card vs. credit card

In a Nutshell

Charge cards and credit cards may look similar, but generally, you have to pay off a charge card’s balance in full each month while you can carry a balance month-to-month on a credit card.
Louis DeNicola is a personal finance writer and has written for American Express and Discover. Editorial Note: Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our marketing partners don’t review, approve or endorse our editorial content. It’s accurate to the best of our knowledge when posted.
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Many people use the terms “charge card” and “credit card” interchangeably.

That’s understandable, because you can use a charge card and a credit card to make a purchase in a similar manner. Plus, the cards often look similar, which may be why some people confuse the two.

But 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.



Charge card vs. credit card

  Charge card Credit card
Has a preset spending limit No Yes
Requires you to pay the bill in full each month Generally yes No (but you must make at least the minimum payment and watch out for APR)
Has late payment fees Generally yes Generally yes
Has an annual fee Depends on the card, but generally yes Depends on the card, but generally yes
Has a wide selection of card issuers No Yes
Holds you responsible for unauthorized transactions Generally no Generally no

The 3 major differences between credit cards and charge cards

Here are the primary differences to consider if you’re weighing the merits of a charge card vs. credit card.

1. 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 you may be charged an over-limit fee every time you do so.

Charge cards generally don’t have a preset spending limit, but the issuer may still limit how much you can spend using the card. Your purchasing power may change based on your payment history, credit, income, debts and other risk factors as determined by the issuer.

How do I get a high-limit credit card?

2. 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. This could be a good thing in some situations, as it can force you to watch your spending and avoid charging more than you can afford to pay off.

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 credit card interest (expressed as a yearly rate known as the annual percentage rate, or APR) is something you’ll want to take seriously. If you carry a balance from month to month, a high APR can end up costing you a lot of money in the long run.

3. With credit cards, you can avoid late payment fees by making a minimum payment on your balance

If you don’t pay a charge card’s bill in full, you may be charged a late payment fee.

Credit card issuers may also charge late fees, but you can avoid them by paying the minimum required amount on time. The CARD Act caps late payment fees on credit cards — the limit in 2021 is $29 for a first occurrence and $40 for subsequent late payments.

A late payment could affect you in other ways too. Michael Bovee, credit expert and founder of Consumer Recovery Network, says that he often sees charge card issuers closing accounts or pausing privileges immediately following a missed payment but that credit card issuers will sometimes be more lenient and leave accounts open. Your experience may vary depending on the issuer or the card, but it’s something to watch out for.

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 will likely review your credit profile. This will result in a hard inquiry. A hard inquiry may remain on your credit reports for up to two years, but the effect on your credit is typically minor.

Utilization

Credit card utilization refers to how much of your available credit you use at any given time. It’s a significant factor credit-scoring agencies use to determine your credit scores.

With a credit card, your utilization rate is determined by comparing your statement balance to your credit limit. If you have a statement balance of $100 and a credit limit of $1,000, your utilization rate is 10%. A lower utilization rate may be correlated with higher credit scores, as it suggests to creditors that you can use credit responsibly without relying too heavily on it.

Since charge cards don’t have a preset spending limit, it can be more difficult to determine a utilization rate. Both VantageScore® and FICO® credit-scoring models don’t account for charge cards when determining your overall utilization rate, though this may not be true for some older scoring models.

Payments

Making on-time payments for charge cards and credit cards can help you build a strong credit profile.

Generally, payments over 30 days late are reported to the credit bureaus, where they can stay on your credit reports for up to seven years and may affect your credit scores, 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 generally must be paid off in full each month, but if you can’t make a payment in full, the issuer may close your card and you’ll have to pay a fee.

So, which is best? It depends on your lifestyle and personal budget. Either type of card can help you build credit if you make on-time payments, but the biggest pros and cons will likely depend on how you use the card — and how easily you’ll be able to pay off the balance in full each month.


About the author: Louis DeNicola is a personal finance writer and has written for American Express, Discover and Nova Credit. In addition to being a contributing writer at Credit Karma, you can find his w… Read more.