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

Credit cards and charge cards both allow you to make purchases and pay them back later, but they're not exactly the same thing. There are a few key differences between credit cards and charge cards. These could trip you up and cost you money if you're not aware of them. Here's a breakdown of each notable difference between a credit card and a charge card.

Balances

The biggest difference between a credit card and a charge card is that you can only carry a balance from month to month on a credit card. With a charge card, you need to pay off the full balance every month.

When you use a credit card, you're only required to make the monthly minimum payment by the due date.

The minimum payment is typically between 1% and 3% of your balance (with a fixed minimum, such as $25 or $35). It's not recommended to pay just the minimum, because it can take months or years to pay off your credit card debt that way, and you incur substantial interest charges. But you do at least have the option.

Charge cards, on the other hand, are designed to be paid in full each month. If you don't, the card issuer can report it to the credit bureaus, which damages your credit score. It can also charge you a late fee or even cancel your card.

Spending limits

Another difference between credit card vs. charge card is how spending limits work with each. Credit cards have fixed limits, but charge cards don't.

When you open a credit card, the credit card company sets a credit limit. This is based on many factors, including your credit history and your income. The credit limit is the maximum balance you can have on the card.

If a transaction would cause you to exceed that limit, it will be declined. Some credit card companies let you opt in for an overdraft feature, but you also pay an overdraft fee for transactions that push you over your credit limit.

Since charge cards are paid in full every month, they're more flexible with limits. They come with no set spending cap, at least that the cardholder is aware of. But that doesn't mean you can use your charge card to go buy a yacht for millions of dollars.

The card issuer will still have an internal spending limit for your card. It may re-evaluate this limit regularly based on your payment history, income, and other factors. Although you can't view your spending limit, there's often a spending power tool in your online account where you can plug in a transaction amount and check whether it will be approved.

Availability

The number of cards and card issuers is a major difference between credit cards and charge cards. Credit cards are the most common, and you can find a credit card to fit almost any financial need. You can get a secured credit card for building or rebuilding credit, for instance. Or if you're looking to maximize the rewards you earn, you can choose from the top credit cards on the market.

Charge cards are much less popular. There just aren't that many out there. You're also unlikely to find a charge card without an annual fee, but there are many no annual fee credit cards.

Approval requirements

It's easier to get approved for a credit card vs. charge card. This is a consequence of some of those differences between credit cards and charge cards.

Because a charge card doesn't have a fixed spending limit and must be paid in full each month, it means more risk for the card issuer. To account for that, a card issuer will usually only approve you for a charge card if you have at least good credit. It could also focus more on your income and payment history.

There are also, of course, credit cards that you can only get with a good credit score. But if you have bad credit, there are credit card options for that, too.

RELATED: Best Credit Cards for Bad Credit

Effect on credit score

One of the most significant criteria in your credit score is your credit utilization ratio. This ratio is the amount of your total credit you're using. If you use too much, it can impact your credit score. It's recommended to keep your credit utilization at or below about 30% to avoid a credit score drop.

Since charge cards don't have a set credit limit, they also aren't considered part of your credit utilization under current credit scoring systems. But carrying a balance on a credit card does affect your credit utilization.

If you spend a lot, this difference between a credit card and a charge card is a nice perk. You can use your charge card, and even if there's a high balance, it won't affect your credit.

Keep in mind that credit utilization is the only difference between a credit card and a charge card when it comes to your credit score. For all the other scoring criteria, both types of cards work the same way.

Is a credit card or a charge card better for me?

Credit cards and charge cards are similar enough that you don't need to choose between them. It's better to pick out the card with the features you like the most, whether it happens to be a credit card or a charge card.

A credit card is more flexible, since you can carry a balance without penalties. There is also a much wider selection of credit cards available.

A charge card can work just as well. You just need to understand the differences between a charge card vs. credit card first, so you know what to expect.

Still have questions?

Here are some other questions we've answered:

• Credit Card Types
• What First-Time Credit Card Users Need to Know
• How Do Credit Card Points Work?