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 amount 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.
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.
Paying Your Bill
We’ll start here, since that’s the biggest difference when considering charge cards vs credit cards.
With a credit card, you’ll get a bill each month that shows a statement balance and a minimum due. The statement balance is the full amount you owe, and the minimum due is a small percentage of what you owe.
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, paying the minimum each month, and carrying the remaining balance over indefinitely. Most credit cards have a grace period, so you can avoid interest completely by paying off the card in full every month. With a credit card you have this option to pay some or all of what you owe, unlike with charge cards.
Charge cards are different. There is no APR, because 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. They may also take other action 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 charge cards have a “pay over time” feature. This feature treats certain purchases like credit card balances, so you have the option to make a minimum payment and pay interest on purchases over time as you pay them off.
A charge card will almost always come with an annual fee. There are many credit cards, on the other hand, that don’t have any annual fee.
Operating a credit card company costs money, so they need to make money somehow.
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, so they charge annual fees.
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 do not have a 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 this limit over time based on your previous charge card balances and payment history. This can allow you to make large purchases with a charge card, but you’ll usually need to pay them off in full when the bill is due.
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 credit cards for people 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, though, or roughly a FICO Score above 760. 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.
How Charge Cards Impact Credit Scores
When it comes to keeping your credit scores up, 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 be sure to pay what you need to pay by your due dates. The main difference between how charge cards and credit cards affect your credit scores is how credit limits are reported to credit bureaus.
The biggest difference in credit score impact is based on how credit limits are reported. FICO scores and VantageScores look at your debt utilization ratio as major factor in your credit scores. For example, if you have a credit limit of $10,000 and a balance of $1,000, your debt utilization ratio is 10%.
A low debt utilization ratio shows that the card limit isn’t being maxed out. A lower percentage is generally better for credit scores. This is why you shouldn’t habitually carry a large balance from month to month if you want to maximize your credit scores, even if you have a card with a 0% introductory APR period.
Remember, charge cards don’t have a published credit limit. When the charge card issuer reports the balance of the card to the credit bureau, the credit scoring models may factor in the highest balance to date and use that as the credit limit if the charge card issuer did not provide a limit.
Charge accounts are reported as “open” instead of “revolving” like a credit card. More recent versions of FICO scoring models will ignore these accounts when calculating debt utilization ratios. However, many lenders are using previous versions of FICO scores, which do not ignore this kind of account.
Other than how credit limits are reported, 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 by your due dates, you’ll increase the average age of your credit lines and accumulate a history of timely payments, which are both very important for good credit scores.
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: 2018
Most issuers do not offer any charge cards, but there are several American Express charge cards on the market today. Some of them offer rewards or benefits that are comparable to the best credit cards. These charge cards earn points that can be transferred to airline or hotel loyalty programs.
Read more about why we picked these cards in The Best Charge Cards: 2018