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

by The Ascent Staff | Jan. 18, 2019

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Charge cards and credit cards both enable you to buy items now and pay later, and they both offer rewards to cardholders. But there are a few key differences between the two that could trip you up (and cost you a lot of money) if you're not aware of them. I've outlined the key differences between credit and charge cards below so you can decide which one is right for you.

Spending limits

When you're approved for a credit card, you're given a monthly credit limit based on your credit score. You can apply for credit limit increases, but you cannot exceed your credit limit, or else your card will be declined, or you'll be charged costly overdraft fees.

Charge cards work a little differently. They come with no pre-set spending limit. But this shouldn't be confused with no spending limit. Instead, it means your card issuer re-evaluates your limit each month based on your credit score, payment history, income, and other factors. You can check your credit limit at any time by logging into your online account or calling the number on the back of your card.

Some of the newer credit scoring models don't consider charge-card balances when calculating your credit utilization ratio (the proportion of your available credit that you're using), because that limit varies from month to month. A high credit utilization ratio tends to lower your credit score. So one of the perks of using a charge card is that you can spend a lot and, provided you pay it off in full when you get your next bill, it shouldn't have a significant impact on your credit score.

Carrying a balance

Ideally, you'll be able to pay your credit card balance in full each month. But if you can't, your credit score won't take much of a hit if you make the minimum payment. However, you will begin incurring interest charges, and these can be as high as a 25% annual percentage rate (APR).

Charge cards are designed to be paid in full each month. If you fail to do so, the card issuer will report it to the credit bureaus, and your credit score will drop. You'll also be charged a late fee, usually around 3% of the balance. That may not seem like much, but this interest is charged monthly. A 3% monthly interest rate adds up to a 36% APR, which is much higher than most credit cards.

Say you have a $5,000 balance, but you can only afford to pay $1,000 when your bill comes due. If you have a credit card with a 20% APR, it'll take you six months to pay it off at $1,000 per month, and you'll end up paying $265.68 in interest. In that same scenario with a charge card, you'll now have to pay 3% interest every month. You'll still pay it back within six months, but you'll pay $501.68 in interest.

Annual fees

Some credit cards charge annual fees. They're most common with secured credit cards and top-rated travel cards that offer generous rewards. But if you're just interested in a traditional cash-back rewards card, you shouldn't have any trouble finding one that doesn't charge you for the privilege of owning the card.

The same can't be said for charge cards. Each one charges an annual fee, and it's not uncommon for that fee to exceed $100 -- and some go as high as $500. These fees may be worth it if the card offers decent rewards, but you'll have to do the math to determine whether it's actually a good value for you.

Availability and acceptance

Charge cards are less popular than credit cards, so there are fewer choices available to you. They're also much more difficult to get because they require an excellent credit score -- usually 740 or above. No pre-set spending limit means an increased risk for creditors if you fail to pay back the debt, so only applicants who have demonstrated a long history of financial responsibility are eligible for these cards.

Which type is better for me?

A credit card is generally the better choice for most people. If you pay your balance in full each month, it works essentially the same as a charge card. But if you need to carry a balance, you can do so without damaging your credit score. Plus, you'll have a lot more choices in terms of rewards, interest rates, and annual fees.

A charge card may be a good fit for you, however, as long as you have excellent credit and you're sure you can pay your balance in full each month. Having no pre-set spending limit gives you the freedom to make larger purchases that a credit card may not allow, without hurting your credit utilization ratio.

If you're still unsure which type of card you should choose, look at some of the cardholder agreements and compare the perks and fees to figure out which one best fits in with your spending habits.

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