What Is the Difference Between Charge Cards and Credit Cards?

What Is the Difference Between Charge Cards and Credit Cards? article image.

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Charge cards can help you build credit and earn rewards just like traditional credit cards, but you must pay your charge card balance in full each month—otherwise, you'll pay a fee. When using a traditional credit card, you're able to carry over a portion of your balance as long as you make the minimum payment each month as set by your credit card issuer.

Another key difference is that charge cards don't come with a set credit limit like traditional cards do. Instead, the issuer can set your spending power based on your purchase behavior and payment history, and your charge card can be declined if a purchase exceeds it.

Read on to learn more about the differences between charge cards and credit cards so you can decide which option is best for you.

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'll be subject to late 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. The Centurion® Card from American Express is one of the few remaining "true" charge cards, and its qualification requirements are extremely strict. Charge cards for gas purchases are also available. In contrast, a wide range of issuers offer traditional credit cards, and there is more variety in the types of rewards, cash back and fee structures available.
  • Acceptance rates: American Express says their cards are accepted as a payment option at 99% of vendors that accept credit cards in the U.S. American Express charge cards still aren't as widely accepted internationally, however, and some may come with foreign transaction fees, which makes them costlier to use than a credit card that doesn't charge fees on foreign purchases. Gas station charge cards may only be accepted at co-branded fueling locations or at gas stations within the card issuer's network.
  • 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.

Pros and Cons of Charge Cards

Charge cards aren't as common as credit cards, but they have some unique benefits that make them worth looking into. Their pros include:

  • Motivation to pay off your full balance: In general, it's best to pay off the balance on your traditional credit cards each month, but you won't be charged a high late fee if you don't. Charge cards add an extra motivation to use credit responsibly by charging both interest and a late fee if you carry a balance.
  • Less likelihood of carrying debt: If you use charge cards the way they're meant to be used, you'll get the flexibility of paying with credit without the drawbacks of carrying debt.
  • No firm spending limit: Charge cards don't give you a specified credit limit when you're approved, though you won't be able to spend an unlimited amount. Before you make a major purchase, check with your issuer to find out the spending power you're granted based on your financial history. That way you can use your charge card without worrying that your transaction will be declined.

Charge cards have drawbacks, too, including:

  • Less flexibility to carry a balance: There might be times when you would prefer to pay off a big purchase in installments. Carrying a balance can be more expensive on a charge card for the reasons listed above.
  • Requires careful tracking of spending: Since you'll need to pay off your entire balance monthly, it's imperative that charge card users take note of their spending and ensure they can pay their full bill when it comes due. Expense tracking and budgeting are good practices in any case, but it's a necessity when using charge cards.
  • Fewer fee-free card options: Traditional credit cards come in many different varieties, including rewards cards targeted at frequent travelers, foodies and those who spend mostly on gas and groceries. Many traditional credit cards don't have annual fees. Charge cards, however, typically do charge annual fees. Their rewards can be stellar, but you'll need to make sure that you use the card enough to rationalize paying the fee.

How Do Charge Cards Affect Your Credit Score?

Traditional credit cards are a type of revolving credit, which means you receive a credit limit and can "revolve"—or carry over—your balance from month to month. Your credit limit (specifically, how it compares with your card balance) is factored into your credit score by way of your credit utilization rate. If you use up a substantial portion of your credit limit, your score can be negatively affected. Charge cards, on the other hand, don't have credit limits, and the most recent FICO® Scores won't count your charge card balance toward your credit utilization. Older FICO® Score models and VantageScore® calculations may include charge card balances in credit score calculations, however.

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 remaining 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, Sunoco, Shell and others.

Deciding Between a Charge Card and a Credit Card

Your spending patterns will typically dictate which type of card is best for you. If you're unlikely to carry a balance and you are willing to pay an annual fee, a charge card is worth considering. Traditional credit cards are the better choice if you might carry a balance from time to time or you're more interested in a fee-free card.

Whenever you're thinking about applying for new credit, it's important to know where you stand in terms of your creditworthiness. You can check your FICO® Score for free anytime through Experian. You'll also be able to view your credit profile and see the factors affecting your scores. Before you apply for a new card, whether it's a charge card or a traditional credit card, you might want to take the opportunity to improve your scores to get the best rates and terms.

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