Charge Cards vs. Credit Cards: What’s the Difference?

Many individuals often confuse "credit card" and "charge card," sometimes even mentioning "no preset spending limit." Despite their similarities, these cards are not identical.

While the way you use your card for purchases remains the same, significant differences exist between a credit card and a charge card, particularly in terms of billing and how they impact your credit report. Let’s explore these distinctions in detail.

What is a Charge Card and How Does it Function?

Using a charge card for purchases functions just like the credit cards you are familiar with: you swipe the card instead of paying with cash and receive a monthly statement from your bank.

However, a charge card usually requires you to pay off your bill in full every month. Failing to do so can incur hefty costs, such as late fees and a penalty annual percentage rate (APR).

Charge cards are often referred to as no preset spending limit cards. Yet, this does not imply unlimited spending. Your spending capacity will change based on factors like your payment history, creditworthiness, and the nature of your relationship with the bank.

Although some card issuers allow you to carry a balance through features like American Express's Pay Over Time, these cards are primarily meant for paying off the balance in full each month, rather than rolling over debt.

It's best to pay off your cards in full each billing cycle, as carrying a balance will incur interest charges.

What distinguishes charge cards from credit cards?

Beyond the ability to carry a balance or make minimum payments, there are other notable differences between charge cards and credit cards.

Credit limits

The primary distinction is that charge cards have no preset spending limit, while credit cards come with a defined spending cap, often referred to as a "credit limit." For instance, if your credit card has a credit limit of $10,000, you cannot exceed that amount until you've settled your bill.

A charge card features no preset spending limit, meaning there is no specific cap on your spending potential. As mentioned earlier, your available spending will vary based on several factors.

However, this doesn't give you carte blanche to overspend. With a charge card, it's essential to only make purchases that you can confidently afford.

Interest rates

Your credit card will specify its interest rate clearly. You'll incur interest charges on any balance that you carry over each month. This rate is referred to as your APR, which may be fixed or a variable rate.

Charge cards are intended for full payment. You might get an option to join a payment plan that allows you to carry a balance and incur the APR specified in the offer. However, aside from this option, your issuer expects you to pay off your total monthly balance.

Failing to do so can lead to several negative consequences:

• Increased interest rates due to penalty APR
• Late payment fees
• Temporary suspension of card usage until the balance is cleared

As a result, you might not see prominently displayed information about interest rates on charge cards, as issuers do not anticipate that you will carry a balance.

Late fees

A credit card statement shows a due date and the minimum payment you must make. As long as you meet this requirement, you won't incur a late fee.

In contrast, failing to pay your entire balance on a charge card by the due date can result in a late fee. Making only a minimum or partial payment won't fulfill the obligation unless you have opted into a payment plan allowing you to carry a balance.

Rewards and perks

In terms of earning points and miles, there is no difference between credit and charge cards. Both types can also come with an annual fee.

However, the range of reward options available with credit cards is much broader than that of charge cards. Cards without preset spending limits generally fit into three main rewards categories:

• Points in the issuer's currency, such as American Express Membership Rewards
• Cash-back options
• Discounts at specific gas station brands

Charge cards are available for both personal and small business use. However, you won't find charge cards that offer hotel points or airline frequent flyer miles. The selection of charge cards and their rewards is significantly more limited compared to the extensive variety of credit cards available.

Recommended credit score

Due to the broader selection of card types, rewards, and annual fee structures associated with credit cards, there are more options for individuals with poor or fair credit.

You can earn rewards with a secured credit card or cash back with options like the Capital One Quicksilver Cash Rewards Credit Card, which offers 1.5% cash back on all purchases.

On the other hand, obtaining a card with no preset spending limit typically requires a higher credit score. Generally, you should aim for a credit score of 670 or above when applying for a charge card.

Credit utilization

Credit utilization constitutes 30% of your credit score. For credit cards, it measures how much you owe (debt) in relation to your available credit (credit limit). For instance, if your credit limit is $10,000 and your current statement balance is $1,000, your utilization rate is 10%.

Charge cards do not have a utilization rate since you cannot divide by zero. This is because they lack a preset spending limit or designated credit limit.

Should I choose a charge card or a credit card?

To determine which type of card suits you best, reflect on these questions:

• Will you be able to pay the balance in full every month? If your answer is "no," you might want to consider a credit card, particularly those with 0% introductory APR if you anticipate needing to carry a balance for a significant purchase.
• Do you currently hold any other charge cards or credit cards? This is crucial for identifying what cards you may qualify for with each issuer. For more guidance, refer to our overview of credit card application rules and restrictions.
• What kind of rewards do you prefer? Are you seeking transferable points or cash back? If you desire benefits tied to a specific airline or hotel, a cobranded credit card may be a better fit than a charge card.
• Are you looking for a personal card or one for a small business? Make sure you're evaluating the appropriate category of card.

Once you've addressed these questions, you can select the card that best fits your needs.

For many consumers, the difference between a credit card and a charge card may not seem significant. However, it's essential to ensure that you're eligible for a card prior to applying, that it offers the rewards you desire, and that you won't incur penalties for improper usage (such as failing to pay the balance in full).

Final thoughts

You might own a charge card without even being aware of it.

There’s no significant difference between applying for a charge card or a credit card, and using them for purchases feels similar. The key distinctions lie in their impact on your credit score and how you manage your payments.