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If you think "charge card" is just another name for "credit card," think again. While these two types of credit work in similar ways, a charge card is different from a credit card because it requires paying off your balance in full every month. Here's a closer look at charge cards, how they differ from credit cards, and how to decide if a charge card might be right for you.
What Is a Charge Card?
Just like a credit card, a charge card allows you to make purchases without having cash available. Each month, you'll get a statement with your balance, but with charge cards, you must pay the full balance by the due date. Currently, American Express is the only major issuer of charge cards.
How Are Charge Cards Different From Credit Cards?
There are some important differences between charge cards and credit cards.
- Credit cards give you the option to pay your balance in full each month or carry over a balance from month to month (called revolving credit). The flexibility this offers can be helpful. For example, if you lose your job, you can conserve cash by making only minimum payments on your credit card balance until you get back on your feet.
- Charge cards require paying off the balance in full every month.
- For revolving credit accounts such as credit cards, the card issuer sets a maximum credit limit; if you reach that maximum, you can't charge any more on that card. As soon as you pay down the balance, however, you can charge up to the account's credit limit again. Learn more about managing revolving credit card balances.
- A charge card doesn't have a hard-and-fast credit limit. However, that doesn't mean you can plunk down your charge card and drive off in a Lamborghini when your only income is a part-time job at Starbucks. Charge card issuers set "soft" limits based on your credit score, income and other indicators of your financial management habits. You can check this limit with the issuer if you're worried that an especially large purchase might be declined.
- A credit card's interest rate is expressed as an annual percentage rate (APR). You're charged interest based on the balance that you carry over from one month to the next. If you pay your balance in full every month, you won't be charged any interest.
- Because charge cards don't allow you to carry a balance, there's no interest to worry about.
- Late fees: Both charge cards and credit cards typically charge late fees if you make a late payment. When using a credit card, you can sidestep the late fee by making a minimum payment, even if you can't pay the full balance right away. With a charge card, that's not an option: If you can't pay the full balance, you'll face a late fee.
- Annual fees: There are a staggering number of credit cards available, many without annual fees. Those that do have annual fees typically offer rewards such as mileage points or cash back. All charge cards have fees, and they're substantially higher than credit card fees; some can run to $500 or more.
Many credit cards offer enticing rewards such as airline miles or cash back on purchases. However, charge cards typically provide even more impressive rewards. For example, rewards for The Platinum Card® from American Express include a $200 airline fee credit, Uber credits, a fee credit for Global Entry or TSA Precheck, access to more than 1,200 airport lounges and more. Of course, it also costs $550 a year. You'll need to weigh a charge card's rewards against the fees to decide if it's worth the cost.
Charge cards typically require excellent credit scores. If you have poor or fair credit, you can still find a credit card that will work for you, but you won't qualify for a charge card.
When Is It Better to Get a Charge Card?
Credit cards may tempt you to overspend, and it can be easy to get in over your head and rack up interest charges. Charge cards, in contrast, can help to enforce financial discipline. Because you know you have to pay off the charge card's balance in full each month, you'll be motivated to keep your spending within reasonable limits. (Of course, you'll need to make sure you have the money available to pay off your charge card every month, or you'll face fees and could even have your charge card revoked.)
Since the most recent FICO® Scores☉ don't count charge card balances toward your credit utilization ratio (more on that below), they can also be useful when you want to make large purchases without maxing out your credit. For instance, suppose you have a credit card with a $10,000 limit, you're planning for your honeymoon, and you want to book a dream trip to Fiji that costs $9,500. Putting that much on a credit card would nearly max out your card, negatively affecting your credit. However, putting it on a charge card would not affect your credit score.
Keep in mind that charge cards are not as widely accepted as credit cards. To avoid getting caught with no way to pay for a purchase, it's a good idea to carry a credit card as a backup.
Does a Charge Card Affect Your Credit Score?
Charge cards can affect your credit score in a couple of ways.
- They can help you reduce your credit utilization ratio. Also called credit utilization rate, this is the portion of your total available credit you're currently using. The lower your credit utilization ratio, the better; experts recommend keeping credit utilization below 30%. Because charge cards don't set a spending limit, a credit ratio can't be calculated. This means a charge card balance won't affect scores calculated using recent FICO® Score models in the same way a traditional credit card would. You can use them to make big purchases that would otherwise max out a traditional credit card and hurt your FICO® Score.
- Paying your charge card balance in full and on time will help to improve your credit score; failing to do so will hurt it. Just as with any type of credit, the key is being responsible.
Are You Ready for a Charge Card?
As long as you use them wisely, charge cards can offer some important benefits, such as convenience, rewards and motivation to avoid overspending. Not sure whether your credit score is good enough to qualify for a charge card? Get a free credit report from Experian and find out.