What is a charge card and how do they differ from credit cards?
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A charge card is a specific type of credit card that requires you to pay the entire balance in full every month. Since you are not allowed to carry a balance from month to month, charge cards do not have interest rates or preset credit limits. Instead, charge card spending limits are dynamically adjusted based on your payment history, credit report, spending habits and financial resources. 1
Contrary to what you may think, charge cards and credit cards are not the same. Each type of card has its own unique features and impacts your credit score in different ways.
In contrast, credit cards allow you to make minimum payments and carry a balance from month to month so that you can pay your balance off over a period of time. Credit cards have set credit limits and interest rates that can vary based upon an applicant’s creditworthiness.
Most charge cards have annual fees that vary between cards but can be as high as $500. 2 While some credit cards have annual fees, there are a variety of no annual fee credit cards available. Whether an annual fee is worthwhile may largely depends on your spending and travel habits.
Since charge card balances must be paid in full every month, there is no interest charged. Credit card interest rates are one of the most important features of the card because they directly determine how much you will be paying to carry a balance on the card. However, you can avoid paying interest on your credit card purchases by paying your balance in full by the payment due date every month.
Charge cards typically have generous rewards programs and additional perks that may not be available with a credit card. Depending on the card’s annual fee, this can include premium travel benefits like hotel room upgrades, free golf or spa services, advanced ticket sales and premium seating at entertainment venues. 3 However, many other member benefits like travel insurance, extended product warranties and flexible redemption options are widely available on a variety of cash rewards cards and credit cards with no annual fees.
Consumers typically need to have good to excellent credit to qualify for a charge card. While not everyone is a candidate for a charge card, there are a variety of options in the market for people with poor to excellent credit. 4
Both credit cards and charge cards can come with various fees and penalties for late payments. If your charge card balance isn’t paid in full by the due date, you’ll face a late fee –either a flat fee or a percentage of your balance.
Credit Score Impact
Charge cards and credit cards can be equally effective ways to build your credit history. However, because a charge card has no interest or set spending limit, determining its impact on the credit utilization part of your credit score is more complicated. Your credit utilization rate is amount of your total available credit on all accounts that is being used. Because credit scoring agencies factor your credit utilization in different ways, older scoring models may factor the charge card’s highest balance in its history as if it were a credit limit. However, newer credit scoring models consider a charge card as part of the credit score’s payment performance component, but discount it within the credit utilization calculation. 3
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The bottom line:
Whether you have a charge card or credit card, the most important factor in building and maintaining a positive credit score is using your card responsibly and paying your bills on time.