What’s the Difference Between a Charge Card and a Credit Card?

Are you thinking about applying for a charge card or credit card? While many people may use charge card and credit card interchangeably, these two cards have key differences. 

Both charge cards and credit cards allow you to pay for items without using cash (unlike a checking account or debit card), but there’s one main difference—charge card issuers expect you to pay off your balance in full every month. By contrast, credit card issuers allow you to carry a balance that you can pay over time.

Charge cards are much less common than they used to be. Most credit issuers have switched to offering credit cards, which tend to be more flexible over the long-term. But modern charge cards often include features that allow them to function a lot like credit cards when necessary. Here are some things to consider about charge cards vs. credit cards, including how to decide which option is best for you.

What’s a charge card?

With a charge card, you can buy things on credit without paying interest—if you pay your balance in full every month.

But if you can’t pay off your charge card in full each month, you card issuer may add a late fee and other penalties to your outstanding balance. If left unpaid, your issuer may close your account to prevent you from making any more purchases on your card.

How do charge cards and credit cards compare?

The main difference between a charge card and a credit card is that a credit card lets you carry a balance while a charge card does not—but that’s not the only thing that sets these two types of cards apart.

How are charge cards and credit cards different?

A credit card comes with a credit limit, which represents the total amount you can charge to the card. Any purchases you make against your credit limit can be factored into your credit utilization ratio.

A charge card usually doesn’t have a preset spending limit. In some cases, you can charge as much as you want to your account—if you pay off your balance in full every month. And, since charge cards don’t come with credit limits, the money you charge to your card is not always factored into your credit utilization ratio.

How are charge cards and credit cards the same?

Both cards allow you to make purchases in person and online, and both cards offer perks and benefits. In many cases you’ll be able to earn rewards on your purchases. It’s also worth noting that both charge card and credit card issuers check your credit history before deciding whether to approve you for a new line of credit. Just like credit cards, charge cards with the best features are often reserved for people who have good or excellent credit scores.

Who can benefit from a charge card?

If you have already established a good or excellent credit score and are prepared to pay off your balance in full every month, you could benefit from a charge card. You’ll be able to take advantage of interest-free purchases, as well as any rewards that come with the card.

Charge cards may offer appealing rewards and perks—but often charge high annual fees in exchange for the benefits. Before applying for a charge card, make sure that any rewards you’ll earn from the card will offset the cost of the annual fee.

You should look for charge cards with rewards that match your lifestyle. For example, if a charge card offers complimentary airport lounge access, ask yourself how often you’ll be able to take advantage of the perk. The same goes for any points, Miles, or cash back you may earn on purchases—if your shopping habits don’t match the charge card’s reward categories, you may want to consider other forms of credit.

Charge cards vs. credit cards: Impact on your credit

Both charge cards and credit cards can impact your credit score, but in different ways. 

Inquiries

When you apply for a charge card or a credit card, the card issuer will likely review your credit history, which may result in a hard inquiry. The effect of a hard inquiry on your credit is usually minor, but it’s still something to note.

Credit utilization

Credit utilization looks at how much of your available credit you’re using and is a big factor determining your credit scores.

Since many charge cards don’t have a preset spending limit (or credit limit), it can be more difficult to determine a utilization rate. Because of this, many credit models don’t account for charge cards when determining your overall utilization rate. 

Payments

On-time payments for charge cards and credit cards can help you build good credit history. Generally, payments over 30 days late are reported to the credit bureaus, and may affect your credit scores, ability to get credit, and the interest rates on your credit lines.

Should you choose a credit card or a charge card?

If you can pay off your balance in full every month, you might consider adding a charge card to your wallet. However, if you find it difficult paying off your balance in full, a charge card may not be your best choice.

If avoiding interest charges are your biggest concern, many credit card companies provide a grace period where you will not be charged interest on purchases if you pay your balance in full and on time each month. If you’re hoping to keep your interest costs low, applying for a traditional credit card and paying off the balance in full every month could be your best option.