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On This Page
- Key Takeaways
- What is a charge card?
- What is a credit card?
- What is the difference between a charge card and a credit card?
- Do charge cards build credit?
- Charge card benefits
- Charge card vs. Credit card How to decide
- Charge card vs Credit card FAQ
On This Page
- Key Takeaways
- What is a charge card?
- What is a credit card?
- What is the difference between a charge card and a credit card?
- Do charge cards build credit?
- Charge card benefits
- Charge card vs. Credit card How to decide
- Charge card vs Credit card FAQ
By Holly D. Johnson - Finance Expert + 1 other
Reviewed By Blake Esken - Los Angeles Times
Updated on SEP 05, 2024 8 Min Read Why Trust Us?
- Charge cards and credit cards are both forms of electronic payment that use borrowed funds and contribute to building your credit score.
- The main difference between charge cards and credit cards is that charge cards have no spending limit and must be paid off in full each month as a basic requirement.
- Credit cards come with high interest rates whereas charge cards have no interest since you are not allowed to carry debt from month to month.
- Both typed of cards offer rewards and help build your credit, but credit cards are the better option if you may need to carry a balance when cash is tight.
- Charge cards only help you build credit through your payment history and adding to your length of credit history.
What is a charge card?
A charge card is a type of electronic payment card that doesn’t require any interest charges, but there’s a catch. Unlike credit cards that let you carry a balance from one month to the next, charge cards require you to pay your entire statement balance in full, usually monthly.
With that being said, charge cards can be just as convenient for payments as credit cards are. When you add in the fact charge cards often come with rewards for spending and other perks, they can actually be quite attractive.
However, charge cards are a poor option if you may need to carry a balance when cash is tight. If you need a card that works as a line of credit you can borrow against, you’ll want to consider credit cards instead.
How do charge cards work?
Because charge cards require you to pay your balance in full each month, they typically do not come with a pre-set credit limit. This means you can charge most purchases you want to your card, but that you’ll have to pay them all off when your balance is due.
However, it’s important to note that no credit limit does not mean unlimited spending. While each card issuer handles charge cards differently, most will base your purchasing power on your regular spending habits, your income and other factors. You may not have a pre-set credit limit per se, but credit card issuers take steps to make sure you never overspend.
As an example, here’s what American Express has to say about their charge cards:
“With American Express Charge Cards, you don’t have to worry about the credit limit while making purchases. The amount you can spend in a period is evaluated periodically and you are required to pay the due amount in full at the end of every billing cycle.”
As we mentioned already, charge cards can offer rewards on eligible purchases, usually in the form of travel points or cash back. Since charge cards never charge interest, there is no regular APR to be aware of. That said, some charge cards do have an annual fee.
What is a credit card?
Unlike charge cards that make you pay your balance in full each month, credit cards extend a line of credit you can borrow against. This means you can make purchases throughout any given month and pay only a minimum payment if you prefer. When you carry a balance on a credit card, you’ll be charged interest on balances you carry beyond your credit card’s due date.
Many credit cards charge a fee for membership each year, although not all of them do. Many credit cards also offer rewards on spending, including bonus points or bonus miles on certain types of eligible purchases.
How do credit cards work?
Because credit cards let you carry a balance from one month to the next, they do assign you a spending limit that caps your purchases. Generally speaking, you can make purchases up to this limit before your card stops working. After you reach your credit limit, you’re still required to make at least the minimum payment on your card each month.
Because credit cards let you carry a balance, they can become a valuable tool in an emergency. If you have surprise expenses or bills to pay and you don’t have the cash, for example, a credit card can work as a short term loan.
Just remember that credit cards charge higher interest rates than other types of loans, including personal loans. The convenience of credit cards also makes racking up credit card debt a breeze. For those reasons, you should only carry a balance when you have to.
What is the difference between a charge card and a credit card?
The main differences between charge cards and credit cards are that charge cards require you to pay your balance in full at the end of every month, don’t charge interest, and come without spending limits. As a result, charge cards typically have higher fees associated with them than credit cards do.
Here is an in-depth look at the main differences between credit cards vs charge cards:
1
Carrying a balance:
Charge cards typically require users to pay their balance in full at the end of each month. Credit cards allow you to pay little by little and carry a debt balance from month to month.
2
Interest:
Since charge cards require you to pay the monthly balance in full, they typically do not have interest charges. Interest is a key part of how credit cards work and how card issuers make their money.
3
Late fees:
Credit cards and charge cards both charge late fees for not paying on time. However, since charge cards don’t charge interest, the late fee on a charge card is typically much higher than on a credit card.
4
Spending limit:
Charge cards can come without a spending limit, whereas a key feature of credit cards is a credit limit to the maximum amount you can charge on the card.
5
Credit score:
Since charge cards offer no credit limit, they typically require great to excellent credit. Credit cards, on the other hand, come with a range of options even for people with bad or poor credit.
6
Card issuers:
There are tons of credit cards on the market these days from a range of banks and issuers. However, charge cards are not as common as they once were. Therefore, the amount of charge card issuers is much fewer than you will find with credit cards.
7
Annual fees:
If you want a charge card, expect to pay a steep annual fee. All charge cards typically carry a high annual fee, whereas many credit cards nowadays come with no annual fees.
8
Balance transfers:
Charge cards don’t allow balance transfers, so you won’t be able to take advantage of the fact that they offer 0% interest. On the other hand, credit cards do offer balance transfers and can help you pay off debt when used tactfully.
9
Cash advances:
You cannot get a cash advance from a charge cards as you normally would do with a credit card. This is largely due to the fact that charge cards don’t have spending limits
Charge Cards vs. Credit Cards Comparison Chart
Charge Cards | Credit Cards | |
---|---|---|
Requires full payment of the entire balance each month | Yes | No |
Charges interest on revolving balances | No | Yes |
Allows balance transfers | No | Yes |
Allows a cash advance | No | Yes |
Charges late fees | Yes | Yes |
May offer a welcome bonus upon account opening | Yes | Yes |
Can earn rewards on spending | Yes | Yes |
How to apply | Fill out a charge card application online | Fill out a credit card application online |
Helps build your FICO score | Yes | Yes |
Do charge cards build credit?
Charge cards and credit cards both report to credit bureaus and will help to build your credit score if you use them wisely. However, charge cards do not have a credit limit and therefore will not take into account credit utilization such as with credit cards. Charge cards will impact your length of credit history and payment history only.
Charge cards help you build credit by building your payment history, which is the most important factor that makes up your FICO score. If you have a charge card in good standing for several years, your card could also help lengthen your credit history which is an important factor of your credit score and why canceling a credit card can hurt your credit score.
Lastly, charge cards also help add to your credit mix, which is another factor that plays a role in your credit health.
Since charge cards require you to pay your credit card balance in full each month, they don’t impact your credit utilization rate — which is the second most important factor that makes up your FICO score.
Either way, it’s important to know that charge cards report your credit payments and history to the credit bureaus. If you want to avoid having a blemish on your credit report, you’ll make on-time payments and use your charge card wisely.
Charge card benefits
If you are wondering why anyone would get a card that doesn’t let them carry a balance, it’s important to understand all the benefits charge cards offer. Some of the biggest perks you can get depend on the new card you apply for, but the major draws of these cards apply across all credit card issuers.
1
Potential for rewards
Like credit cards, many charge cards have their own rewards programs. With a charge card from Amex, for example, you can earn valuable Membership Rewards points which are good for a gift card, statement credits, travel through amextravel.com or point transfers to Membership Rewards hotel partners and airline partners. While some charge cards limit how many bonus points you can earn each calendar year, others offer unlimited rewards on your spending. You may also be able to earn a sizable welcome bonus during your first year of card membership, although it’s likely a minimum spending threshold applies.
2
Potential for perks
Depending on the issuer, your charge card could help you qualify for a slew of perks. Travel-related benefits can include airport lounge access or fee credits toward Global Entry or TSA Precheck membership. Many charge cards also come with no foreign transaction fees and cardholder perks like statement credits, travel insurance and purchase benefits.
3
Avoids debt
Also note that charge cards do not offer the option to rack up credit card debt. This is a benefit that debit cards have as well. When you are not allowed to carry a balance month-to-month in a pinch, you have a better chance at building positive credit habits and staying on track with your spending.
4
Builds credit
Finally, we already noted how charge cards help build your credit scores with FICO and VantageScore. While charge cards don’t impact your credit utilization rate, they use your payment history to build positive credit that lasts.
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Best for Luxury Travelers
The Platinum Card® from American Express
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Annual Fee
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Regular APR
See Pay Over Time APR
Recommended Credit
Good/Excellent (670 - 850)
EARNING REWARDS
Earn 5X Membership Rewards® points for flights booked directly with airlines or with American Express Travel (on up to $500,000 on these purchases per calendar year), 5X points on prepaid hotels booked with American Express Travel, and 1X points on other eligible purchases.
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Annual Fee
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Regular APR
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Recommended Credit
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Charge card vs. Credit card: How to decide
The best card for you depends on how you plan to use it. If you want the option to carry a balance month-to-month, for example, a credit card is a better choice. If you’re someone who can always afford to pay their credit card balance in full, on the other hand, a credit card or a charge card would work.
In addition to considering your financial situation and how much cash is in your bank account at the end of the month, you should also think about perks and rewards. For example, you won’t find a charge card that earns Chase Ultimate Rewards® points or airline miles in the American AAdvantage program. So, if those rewards programs are a priority for you, you’ll have to go with a credit card instead.
Other factors to consider include limited-time offers, cardmember perks and third-party benefits like DashPass membership, Priority Pass Select membership and Amex Centurion Lounge access.
At the end of the day, either type of card could work for your needs. Once you compare options based on these factors and others that are important to you, you’re bound to find the right fit.
Learn more about the rates and fees associated with the Platinum Card® from American Express.
Charge card vs Credit card FAQ
Are charge cards only offered by specific issuers?
Many financial institutions have begun to phase out charge cards. This being the case, charge cards are only offered by a limited number of issuers.
Is it possible to switch from a charge card to a credit card?
You are not able to change from a charge card to a credit card, but it is possible to downgrade your credit card to a charge card.
About the Author
Holly D. Johnson Finance Expert
Holly D. Johnson is an award-winning personal finance writer who covers topics like insurance, investing, credit and family finance. As a leading voice in the travel and loyalty space, Johnson has traveled with her family to more than 50 countries over the last decade.
The author has also written extensively on the power of household budgeting, and she even co-authored a book on the topic. Zero Down Your Debt: Reclaim Your Income and Build a Life You’ll Love was originally published in 2017, and it teaches families how to use zero-sum budgeting to reach their financial goals. She is also the co-owner and founder of the family finance and travel website, ClubThrifty.com.
Johnson’s 10+ years of writing have focused on helping families make important financial decisions at each stage of their lives. The author also applies the financial principles she teaches to her own life, and she is currently on track to retire in her late 40’s with her partner. She currently lives in Central Indiana with her husband and children, and she is a regular contributor for Bankrate, CNN, Forbes, U.S. News and World Report Travel and many other notable publications.
* Opinions expressed here are those of the LA Times Compare Cards Team and have not been reviewed or approved by any advertiser or entities included within this content. See our editorial policy for more details.
All products or services are presented in this content without warranty. The information, including card details such as rates and fees, is accurate at the time of publish. Please visit each bank's website directly for the most current information.
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