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Charge Cards vs. Credit Cards — What’s the Difference?

8 min read
John Ganotis Michelle Black By John Ganotis
Expert reviewed by Michelle Black
Updated Sep 04, 2020
At a glance

Charge cards must typically be paid off in full at the end of each month. Credit cards allow you to carry a balance over time, but you’ll still have a minimum monthly payment, and your balance will usually incur interest fees.

What’s the Difference Between Charge Cards and Credit Cards?

The main difference between charge cards and credit cards is how much you have to pay off each billing cycle compared to how much you owe:

  • Charge cards generally require that you pay off the full amount you spend on the card each month.
  • Credit cards only require that you pay off some minimum amount of the total balance you owe each month. You can carry the rest over onto next month’s bill, although we recommend you always pay off your full statement balance every month to avoid paying expensive credit card interest charges.

Keep reading to find out more about the key differences between credit cards and charge cards. The better choice for you mostly depends on whether you plan to carry a balance.

Insider tip

Check out our top picks for the Best Charge Cards.

Paying Your Bill

As mentioned, the biggest difference when considering charge cards vs. credit cards has to do with how you pay your bill.

Credit Cards

With a credit card, you’ll get a bill each month that shows a statement balance and a minimum payment due. The statement balance is the full amount of money you owe the card issuer (or how much the card issuer has loaned you). The minimum payment due reflects a small percentage of what you owe (usually 2%, though sometimes more).

As long as you pay at least the minimum due, your credit card issuer will consider your account to be in good standing and you won’t be charged a late fee. If you make at least the minimum payment, but don’t pay the full amount you owe in a statement period, the remaining balance will carry over to the next month. This is called “carrying” or “revolving” a balance.

A credit card has an APR (Annual Percentage Rate), which is effectively the interest rate. When you carry a balance from one month to the next, you’ll be charged interest, unless you have a 0% introductory APR.

As long as you have available credit, it’s possible to continue charging new purchases to the card. You can pay the minimum amount due each month and carry the remaining balance over indefinitely — at least until you max out your credit limit. But this isn’t a good way to manage your account.

Most credit cards have a grace period. You can avoid interest fees on purchases completely if you pay off the card’s statement balance in full every month, and although this is best, you don’t necessarily have to. You can choose to pay some or all of what you owe, unlike with charge cards.

Charge Cards

Charge cards work differently than credit cards. For starters, there’s no APR on a charge card. Instead, you’re expected to pay off the full amount you spend every month. You can’t simply pay part of your bill and pay interest on the rest.

If you fail to pay the entire balance by the due date, the issuer may charge a late fee, which is often around $30–$40. Your card issuer may also take other actions on your account. For example, you may not be allowed to make additional purchases on the card until your past-due balance is paid off.

Some Amex cards, which used to be standard charge cards, now offer a “Pay Over Time” program. This feature allows you to carry eligible charges from month to month at interest, like a typical credit card. Eligible charges can be included in a Pay Over Time balance, up to the Pay Over Time Limit. Eligible charges include purchases, foreign transaction fees, and annual membership fees. The following are ineligible for Pay Over Time: cash advances, including cash and other cash equivalents, certain insurance premiums, and any other fees owed to American Express. The Pay Over Time Limit applies to the total of the Pay Over Time, cash advance, and Plan balances.

All charges not added to a Pay Over Time balance or monthly payment plan or cash advance balance must be paid in full each month by the payment due date.

Annual Fees

A charge card will almost always feature an annual fee. There are many credit cards, on the other hand, that don’t require annual fees from cardholders.

Many credit card companies make most of their money from interest fees. They charge these fees when people don’t pay in full and carry balances to the next billing cycle.

Since charge cards need to be paid in full each month, charge card companies can’t count on making revenue from interest fees on those cards. As a result, they charge annual fees to help cover operating expenses and earn a profit.

Some annual fees can be expensive, especially on premium travel cards. Yet before you write off a charge card or a credit card because it charges an annual fee, keep the following in mind. If the benefits you receive from credit card or charge card outweigh the cost of its annual fee, the account may be well worth the expense. If you don’t think you’ll use a card’s benefits, however, a different card may be a better fit for you.

Credit Limits

Credit cards have a set credit limit. Credit card companies tell you the maximum balance you can have on a card at one time.

Charge cards generally have no preset spending limit. That doesn’t mean you can spend an unlimited amount. Instead, it means the charge card has an unpublished maximum spending limit for the account based on your spending habits, income, and creditworthiness.

The financial institution will adjust your unpublished spending limit over time, based on your previous charge card balances and payment history. These adjustments can allow you to make large purchases with a charge card, but you’ll usually need to pay the balance in full when the bill is due.

American Express offers a feature for its cards that lets you check your spending power at any given time. You can also do so through the Amex mobile app, but be aware that you can only check a certain number of times per day as a fraud prevention measure.

Credit Requirements

Banks offer credit cards for many levels of credit, from bad to excellent. There are credit cards for students who have no credit history established, and high-end travel rewards cards for cardholders with many years of responsible borrowing. The fees, credit limits, benefits, and rewards can vary widely from one card to the next depending on the credit history of the applicant.

Charge cards generally require excellent credit to qualify. Ideally, you should have a FICO Score above 760 before you apply, although you could be approved with lower scores as well. Since charge cards can allow for large purchases, charge card issuers want to make sure you have the track record and financial resources to pay off what you spend each month.

Cash Advances

A cash advance is when you use a credit card to get money out of an ATM. You’re borrowing money using your cash advance credit line, which is separate from your regular credit line.

Cash advances usually have high fees and very high interest rates. We recommend avoiding them unless it’s an absolute emergency. Interest will also start accumulating immediately, with no grace period, so they can get expensive quickly.

However, cash advances can work a bit differently with charge cards compared to typical credit cards. Certain American Express cards, for instance, offer the Express Cash system on certain types of cards (and more traditional cash advances on others). Express Cash lets you designate a bank account to make withdrawals from, and will provide you with a PIN to use. Essentially, your Amex card becomes an ATM card that lets you access the funds in your own bank account — albeit at a wider variety of ATMs than your bank alone may offer.

When you withdraw funds at an ATM with an Amex charge card, it will withdraw the money directly from your chosen bank account. In addition to any applicable ATM fees, you’ll also pay a fee of 3% or $5, whichever is greater.

Since you’re withdrawing your own money rather than borrowing the bank’s money, you won’t pay any interest fees. Once you pay the fee and get the cash, the process is complete.

This makes Amex charge cards some of the best options for taking out cash advances, but in this case they aren’t really cash advances. They’re more like regular bank account withdrawals, with a fee. If you need cash quickly, can’t make a withdrawal in person, and don’t have a debit card you can use, Amex’s Express Cash system is a much better alternative to regular credit card cash advances. However, you’ll still be better off withdrawing funds from your bank account in a more traditional way.

Insider tip

Money orders are typically coded as cash advances when purchased with credit cards. But Amex charge cards will handle them differently, either processing them as regular purchases or potentially declining those transactions. Your mileage may vary depending on where you purchase money orders.

How Charge Cards Impact Credit Scores

When it comes to keeping your credit scores high, financial responsibility is key for both credit and charge cards. You need to be aware of your terms and how much you’re spending, and you should be sure to pay what you need to pay by your due dates.

The Issue of Utilization

There are two major differences between charge cards and credit cards when it comes to revolving utilization (also known as credit utilization). The first dissimilarity is that charge cards no longer count in your credit utilization ratio starting with FICO Score 8. VantageScore doesn’t consider charge cards when calculating utilization either.

The different treatment is important to note because credit utilization is a major factor in your credit scores. From a scoring perspective, lower utilization is typically better. This is why you shouldn’t habitually carry a large credit card balance from month to month if you want to maximize your credit scores, even if your card has a 0% introductory APR period.

Now, if a lender uses an older version of the FICO Score, charge cards may still be factored into utilization calculations. The use of older scoring models is common among some lenders, especially in the mortgage space. Here’s where the second dissimilarity between charge cards and credit cards comes into play.

Charge cards don’t have a published credit limit. So, older versions of FICO scores can’t calculate your debt utilization ratio on a charge card in the same way they do for a credit card.

When a charge card issuer reports the balance of the card to the credit bureaus, it must report your historical high balance on the account if no credit limit is available. Older FICO scoring models can factor in the highest historical balance in place of the credit limit when it calculates your revolving utilization ratio.

Unfortunately, unless you’ve run up an extremely high balance on your charge card in the past, this treatment can lead to credit utilization problems.

Let’s assume the highest historical balance on your charge card is $5,000. You currently have a $2,500 balance reported to the credit bureaus. Older versions of FICO would consider your charge card to be 50% utilized, even though your unpublished spending limit is likely much higher than $5,000.

As you know, a credit utilization ratio of 50% is considered high and typically isn’t good for your credit scores. Charge accounts are reported as “open” instead of “revolving” like a credit card. As mentioned, more recent versions of FICO scoring models will ignore these accounts when calculating credit utilization ratios.

Similarities in Credit Impact

Other than how credit limits are reported, credit and charge cards have the potential to help your credit over time in the same ways. If you keep your accounts open for a long time and pay by your due dates, you’ll increase the average age of your credit lines and accumulate a history of timely payments. Both of these actions may help you build positive credit.

If you make late payments or your payments get returned, these delinquencies will show up on your credit reports whether you’re using a charge card or a credit card. The biggest factor in most major credit scoring models is payment history, so late payments can bring down your scores significantly with either type of card.

Our Picks for the Best Charge Cards

Most issuers do not offer any charge cards, but there are several American Express cards on the market today that are similar to the traditional charge card.

While they typically need to paid off in full each month, they also have a Pay Over Time feature that lets you carry a balance over time, like a typical credit card (for eligible purchases only). We discussed that feature above.

They offer perks that are comparable to the best credit cards, and earn rewards points that can be transferred to airline or hotel loyalty programs.

Read more about why we picked these cards in The Best Charge Cards.

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