Credit Cards vs Charge Cards

Brendan Harkness

Brendan Harkness | Blog

Jul 09, 2014 | Updated Apr 27, 2016

Credit cards and charge cards use different types of payment plans: the basic difference is that credit cards let you carry a balance from month to month, while charge cards don’t. Charge cards need to be paid off in full each month, making them a good credit option for people with a tendency to quickly rack up lots of credit card debt.

Check out our picks for the best charge cards for different purposes.

Credit and charge cards are almost 2 versions of the same thing, built for people who want to pay off debt differently.

Charge cards come in almost all of the varieties that credit cards do, focusing on business, rewards, airlines, traveling, hotels, or particular stores. Charge cards and credit cards provide similar point rewards, cash back, and travel discounts, so you can still look forward to these kinds of benefits with either.

There are no significant differences when it comes to the rewards and benefits offered by these cards. The reasons people choose one over the other have to do with the way purchases are paid for over time.

Debt Repayment with Credit Cards and Charge Cards

Credit Cards

Both credit cards and charge cards let you charge purchases to your account, but credit cards let you carry what is called a “revolving” balance. Revolving balances can persist from month to month, throughout the year.

Depending on which credit card you have, you’ll be issued a monthly interest rate for purchases, and probably for balance transfers and cash advances as well. This is known as an APR (Annual Percentage Rate), but it’s usually given as the monthly interest rate, for example 16.9% Your interest rates are usually determined by your credit score: a better score equals lower rates. When issued a credit card you’ll be given a credit limit, the maximum amount you’ll be able to borrow at one time, which is also based on your credit score.

If you accumulate debt throughout the month and don’t pay it all off by your due date, your balance will accumulate interest. Each month, a credit card statement comes with a minimum payment that must be paid; otherwise, you’ll be charged a late fee, often up to $35. You can choose to pay the minimum payment each month and accumulate interest or pay off your entire balance each month, so you end up paying no interest on your purchases.

Charge Cards

Since you can’t carry a balance from month to month on a charge card, there are no interest rates to pay. Like a credit card, in some cases you might be given a credit limit when you are issued a charge card, which limits the amount you can borrow each month.

Charge cards are used to pay for items just like credit cards, but the card balance must be paid in full by the due date. If you fail to pay off your balance by the due date, you’ll be charged a late fee, which can often be up to $37. For some cards there are other penalties; if you fail to pay for 2 months in a row, for example, you may incur a fine of 2.99% of your outstanding balance. You won’t be able to make any more purchases while you have an outstanding balance.

The Verdict

Credit cards are great if you are a responsible shopper, and pay off your balance as you go. You can be granted award points, discounts, shopping and travel benefits, fraud protection, and have some extra time to pay off your purchases. If you spend too much and can’t pay off your balance, however, you’ll be punished with interest rates each month.

Charge cards are for people who like credit cards but don’t trust themselves to spend responsibly, only buying what they can afford. They are a good debt-reduction tool, providing the benefits of a credit card along with a monthly wall against overspending. You still have to watch what you spend every month, but there is far less risk than with a revolving credit card balance that accrues interest.

The Effects of Credit Cards and Charge Cards on Credit Scores

Misusing credit cards or charge cards will hurt your credit report. If you pay late or not at all, this will be reflected badly on your report.

When it comes to credit cards, the credit scoring models used by FICO® and VantageScore® look at your debt utilization ratio when determining your credit score. This is the ratio of debt to credit that you’re holding. For example, if you have a credit limit of $10,000 and a balance of $1,000, your debt utilization ratio is 10%.

A lower debt utilization ratio shows that the card limit isn’t being maxed out.  This is good for your credit, and this is why you shouldn’t habitually carry a large balance from month to month, even if you don’t mind paying the interest.

Charge cards, on the other hand, don’t always have a credit limit, and since you’re supposed to pay them off they may not be carrying a balance at the end of the month. When the charge card issuer reports the balance of the card to the credit bureau, instead of using a pre-set spending limit the credit score developers may decide to take the highest balance to date and use that as the credit limit.

Charge accounts are reported as “open” instead of “revolving” like a credit card.  If they’re using the most recent version of the FICO scoring software, when credit bureaus see this they will ignore the account when calculating debt utilization ratios. However, the large majority of credit bureaus are using previous versions of FICO, which do not ignore this kind of account.

Other than that difference, credit and charge cards will help your credit over time in the same ways. If you keep your accounts open for a long time and pay on schedule, you’ll increase the average age of your credit lines and accumulate a history of timely payments, both very important for a good credit score.

The Verdict

When it comes to keeping your credit score up, there’s no practical difference between credit cards and charge cards. For each, the key is financial responsibility: you need to be aware of your terms and how much you’re spending, and be sure to pay what you need to pay by your due dates. If you do so, you’ll be able to continually improve your credit score.

For more information on charge cards and to find out if they’re right for you, check out our blog post: “What is a Charge Card and Should I Have One?”

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