The differences between a charge card and a credit card may seem minimal, but these card types function very differently behind the scenes. There are two primary distinctions: how you can pay off your balance and how credit bureaus report your account details.
Choosing the right option can have a big impact on how you manage your spending each month and how your credit score is calculated. Take a closer look at how charge cards and credit cards work so you can confidently choose the one that best meets your specific needs.
- A charge card doesn’t allow you to carry a balance; you must pay the balance in full each month or face late fees and penalties.
- You can carry a balance with a credit card, but your account will accrue variable interest.
- Both types of cards report your payment history to the three major credit bureaus.
- Credit card balances count toward your credit utilization ratio, which makes up 30% of your credit score. Charge card balances are generally not included in utilization calculations since charge cards don’t carry a preset credit limit.
Charge Card Vs. Credit Card: The Difference Is In The Balance
Both a charge card and a credit card allow you to make purchases with borrowed funds. But there are major differences between the two when it comes to paying off your balance, accruing interest and fees and more.
What Is A Charge Card?
A charge card lets you make purchases with borrowed funds, typically without a pre-set spending limit. On top of that, your outstanding balance doesn’t accrue any interest, provided the full balance is paid on time. What’s the catch?
You must pay your balance in full each month, meaning you can’t carry over debt to the next month as you can with a credit card. If you’re late making a payment, you may have to pay a late fee. Additionally, charge cards usually come with an annual fee.
There’s also some ambiguity when it comes to your spending ability. Even though charge cards don’t have formal credit limits, the issuer can approve or deny purchases based on your credit history and other spending behaviors. It can also assign a spending limit if your credit profile changes because of past-due payments or high credit card balances.
Qualifying for a charge card is harder than for some credit cards. You’ll need a good-to-excellent credit score and strong repayment history, as well as consistent income. Charge cards are less common today, but American Express still issues them in the U.S. Its charge card options come with comprehensive rewards benefits that include points, credits and cash back.
What Is A Credit Card?
Most consumers know about credit cards (and have seen offers in the mail). A credit card is a form of revolving credit that comes with a pre-set spending limit. You cannot charge more than that dollar amount or you could have a transaction declined.
Unlike with a charge card, you don’t have to pay your balance in full at the end of the statement period. Instead, you can make a minimum payment. Any remaining balance, however, begins to accrue interest, which adds to the total amount you owe. Your annual percentage rate (APR) reflects how much you’ll be charged. Late fees are generally applied when you miss your payment due date, and some cards carry an annual fee, especially if they include perks like a rewards program.
Eligibility for a credit card is more flexible than for a charge card. Your credit history remains a major factor in approval decisions, but you could still get approved with a lower score. You just might have a lower credit limit and a higher interest rate. Higher-scoring applicants may also qualify for better rewards programs, which can include benefits such as travel perks and cash back on purchases.
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Credit Bureau Reporting Differences
Credit cards and charge card payments are both reported to the three major credit bureaus – Equifax, Experian and TransUnion – so your payment history on each type of card can impact your credit score. That means on-time payments boost your score, while late payments lower it. Those negative line items also stay on your report for up to 7 years.
However, a credit card is considered a type of revolving credit, while a charge card is considered an open credit account. That changes how your balances are reported. Any credit card balance counts towards your credit utilization ratio, which accounts for 30% of your FICO® score. So, if your total credit limit across all your credit cards is $10,000 and you have $5,000 in balances, your credit utilization ratio is 50%.
But since a charge card doesn’t come with a credit limit, any balance you accrue throughout the month isn’t counted towards your credit utilization for most scoring models. You can help your credit score by making on-time payments, without worrying that high utilization rates will bring it down.
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Pros And Cons Of Charge Cards Vs. Credit Cards
Which is the better option to use for your purchases? Charge cards encourage disciplined spending but lack payment flexibility. Credit cards, on the other hand, offer flexibility in how you pay off your balance, but carry interest risk.
Let’s take a look at a more detailed comparison of the pros and cons of both types of cards.
| Charge Card | Credit Card |
|---|---|
| Pros: | Pros: |
| No interest Flexible spending limit Doesn’t impact credit utilization ratio | OK to carry a balance Can make minimum payments rather than paying off the full balance Options available for many credit profiles and borrowers |
| Cons: | Cons: |
| Must pay in full monthly High annual fees Strict eligibility requirements | High interest charges if you carry a balance Fixed spending limit Balance increases credit utilization |
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Which Is Right For You?
As you’re choosing between a charge card and a credit card, here are some things to consider before you apply.
First, think about eligibility. Do you have a strong credit score? If so, both types of card could be viable options. But if you have a shaky credit history, you may not be approved for a charge card. Instead, it may be worth applying for a credit card designed for individuals with either a low credit score or no credit history.
Next, think about your spending habits. Do you have the discipline to pay off your balance in full each month? Maybe you get paid monthly and want to make a large purchase, but you wait to pay for it. Or maybe you want to accrue cash-back points without affecting your credit utilization ratio. If any of these scenarios resonate with you, a charge card is worth considering.
A credit card may be a better choice if you like the idea of a financial safety net thanks to the option of carrying a balance forward. Plus, you have clear spending limits, so you know exactly what you can charge and what needs to be covered elsewhere. And if you’re in the process of building your credit, a credit card is easier to qualify for and manage than a charge card.
FAQ
The Bottom Line: Choose The Right Option For Your Spending Habits
There’s no clear-cut winner when deciding between charge cards and credit cards. Each card type is designed for a different purpose. A charge card requires financial discipline and a strong credit history, whereas credit cards are more accessible and offer greater flexibility.
While it’s fine to compare perks and rewards programs, first take a look at your spending style and credit goals. From there, you can pick the type of card that makes the most sense for how you manage your money each month.
Ready to find the right credit card for your spending style? Learn more about how credit cards can help you meet your financial goals.
Lauren Ward
Lauren Ward is a writer with over a decade of experience covering financial topics for businesses and publications. Her work has also been featured in major publications such as U.S. News and World Report, CNN, Business Insider, The New York Post and Bankrate. Her expertise includes real estate, mortgages, small business, insurance and more.
