What Is the Difference Between Charge Cards and Credit Cards?

What Is a Charge Card?

A charge card is a type of credit card with no predetermined credit limit, meaning you can spend as much as you want. However, you must pay off the balance by your due date to avoid penalties. Interest won't accrue as it would with a traditional credit card, unless you opt in to a specific pay-over-time or installment plan offering as outlined by your credit card issuer. Charge cards are hard to find, but American Express offers several cards with no preset spending limit that have features typical of charge cards.

Pros and Cons of Charge Cards

Charge cards are a unique financial tool, and they're worth considering as long as you understand their benefits and downsides.

What Is a Credit Card?

A credit card is a type of revolving credit that lets you charge up to a certain credit limit and pay off purchases over time. You'll then pay interest on the portion of the balance you carry. There is a wide variety of credit cards out there, from those that offer cash back or travel rewards to secured credit cards that help you establish or rebuild credit.

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Pros and Cons of Credit Cards

Using credit cards is a powerful way to build your credit and to flexibly make purchases while also potentially earning rewards. But they can also lead to debt if not used intentionally. Here are the pros and cons to take into account.

Key Differences Between Charge Cards and Credit Cards

Both charge cards and credit cards let you buy items that you might not be able to pay for right away with cash. But there are several major differences between the card types.

• Monthly payment required: Charge cards require you to pay your full balance each month. If you don't, you could be subject to fees and interest charges. Traditional credit cards also charge interest if you carry a balance, but you'll only have to pay a late fee if you make your payment after the due date. Credit cards come with a minimum monthly payment due that can be much lower than your total balance.
• Availability: Charge cards are becoming more of a rarity. Many issuers offer traditional credit cards, and there is more variety in the types of rewards and fee structures available.
• Acceptance rates: Traditional credit cards are a safe bet as a payment method if they're in the Visa or Mastercard network. Traditionally, American Express wasn't as widely accepted, but the company says customers can now use their cards at 99% of vendors that allow payment by credit card in the U.S. While American Express still is not accepted as broadly as Visa and Mastercard internationally, acceptance rates are increasing.
• Interest charges: Since you're expected to pay off your balance each month, charge cards don't accrue interest charges or fees if you use them as designed. Credit cards charge interest if you carry a balance.

How Do Charge Cards Affect Your Credit Score?

With traditional credit cards, your credit limit and how it compares with your credit card balance is factored into your credit score via your credit utilization rate. If you use up a substantial portion of your credit limit, your credit utilization will be high and your score can be negatively affected. Charge cards don't have credit limits, however, and are generally considered open credit accounts as opposed to revolving credit accounts. Therefore, credit scoring models generally won't count your charge card balance toward your credit utilization.

In practice, this means charge card balances may not be as much of a factor in your credit score calculations. So as a responsible charge card user, you could get the credit score benefits of making on-time payments without the drawbacks of a balance added to your credit report.

Where Can I Get a Charge Card?

The number of charge card options is relatively limited. The major credit card issuer that offers the most charge cards for both individuals and businesses is American Express.

Businesses that operate fleets of company vehicles can also apply for gas cards that work like charge cards: You'll pay for gas for your business's fleet with the card—usually at specific locations associated with the card issuer—then pay the balance in full each month. Fleet card issuers include WEX, Fuelman, Shell and others.

Should I Get a Charge Card or a Credit Card?

To decide whether to get a charge card or a credit card, consider your personal spending patterns, budget and goals.

When to Consider Getting a Charge Card

A charge card may be for you if:

• You're committed to paying your full balance each month. If your budget allows for a charge card, meaning you have the flexibility to cover your full balance every time your bill is due, you can take advantage of the impressive rewards and credit score benefits available.
• You can afford an annual fee. Charge cards often come with annual fees, which can cost several hundred dollars. Make sure you will use the card enough to justify the fee.
• You want flexible spending limits. Perhaps you foresee making large purchases, or you want your credit limit to be dynamic without having to request a larger one. Charge cards provide spending limits that are a closer match with your current card usage rather than your credit history only.

When to Consider Getting a Credit Card

A credit card, however, is likely a better choice when:

• You regularly carry a balance. Credit cards are more amenable to situations when you can't or don't want to pay off your full balance, since you won't have to pay extra fees or register for a particular program to do so.
• You're building or improving your credit score. There are credit cards available for those who are focused on establishing or improving credit, like secured cards. You may not qualify for premium charge cards if you don't have good or excellent credit. And using a charge card properly won't have as positive an impact on your credit score as using a credit card would.
• You want a card with no fees. Since there are so many credit cards out there, you're likely to find one with no or low fees that is also geared toward your credit profile.

The Bottom Line

Charge cards are less prevalent than credit cards. But they may be a good choice for those who want a flexible credit limit and valuable rewards—and who can afford an annual fee and the requirement to pay their monthly bill in full. Credit cards are a solid option, however, since they're more widely available and come with a number of benefits. The choice comes down to how you plan to use the card, and what your current budget has the room for.