Charge Card Vs. Credit Card: What Are The Differences?

On the surface, it may seem like there is little difference between a charge card and a credit card. But, while both allow you to finance purchases to pay off at a later date, they have different rules in regards to payments and credit limits.

If you pay your balance in full and on time every month and need a high spending limit, a charge card might be a good choice, according to credit expert John Ulzheimer, formerly of FICO and Equifax. “At the end of the month, you have to write, in some cases, a really big check,” he says about charge cards. “And you don’t have a whole lot of options when it comes to prolonging your payback of the balance. It’s a built-in debt-prevention tool within the card.”

Savvy budgeting and financial prowess can put you in a position to pay off your card in full each period. But if you tend to carry a balance from month to month, a credit card is likely better for you. Here are a few key differences between the two card types, along with guidance on choosing the best one for your lifestyle.

Charge card vs. credit card

3 main differences between charge cards and credit cards

When comparing the differences between charge cards and credit cards, here are the most important things to keep in mind:

1. Charge card balances must be paid in full each month

Most charge cards require cardholders to pay their balance in full each month, whereas credit card holders can carry a balance (but with added interest charges).

Because charge cards don’t allow you to carry a balance, they typically do not charge an APR. However, if you miss a payment, you will likely incur a late fee — or worse, risk having your account suspended or closed. Be sure to read your charge card or credit card agreement closely to avoid unexpected charges or situations.

Credit cards, however, charge a fixed or variable APR on any balances you carry from month to month. You’ll also likely pay interest on cash advances or late payments. That said, even today’s best credit cards can become debt traps in the wrong hands, so the added discipline demanded by charge cards may appeal to some. Regardless, paying your credit card balance in full each month will leave you in a better financial position over the long run.

2. Charge cards come without preset credit limits

Unlike credit cards, which come with a preset credit limit, charge cards typically don’t offer a preset credit limit. However, this doesn’t necessarily mean there’s no maximum to your monthly spending with a charge card. Your issuer may set a spending limit based on factors such as your income and spending habits.

Depending on your payment history, credit record and other aspects of your card usage, the limit can be moved to fit your needs and risk factors — a useful feature when running a business or spending heavily. Although it’s not uncapped spending, this feature can still be a major advantage of charge cards.

Credit cards come with preset credit limits, which the issuer determines during the approval process. The limit that you’re approved for will depend on various factors, such as your credit score, credit history and income. With a credit card, you can have your credit limit increased, but these increases are usually less frequent and require approval from your issuer. If you’d like to increase your credit card limit, it’s never a bad idea to ask your issuer.

3. Charge cards typically charge steep late fees on unpaid balances

The types of fees you may take on with a charge card are generally the same as with a typical credit card, but there are a couple of differences worth mentioning. Rather than running up interest on outstanding balances, you will likely be charged a steep late fee on an unpaid monthly balance with a charge card. Accumulating too many late fees may also lead to account closure or suspension.

For instance, The Plum Card® from American Express charges a late payment fee of $39 or 1.5 percent of the past due amount (whichever is greater) on the first late payment. If you neglect to pay for two consecutive billing periods, a fee of $39 or 2.99 percent of the past-due amount (whichever is greater) will apply.

On the other hand, with a credit card, you can carry a balance and avoid late fees entirely by paying the minimum payment due each month. Carrying a balance means you’ll be charged interest, but you won’t be subject to late fees as long as you make your minimum payments.

Should you fail to make your minimum payment due, most credit cards also feature late payment fees. However, some credit cards — like the Discover it® Cash Back — waive the late fee for your first late payment (then a fee of up to $41). For most credit cards, you’ll typically pay a late fee of up to $41 for any late or returned payments.

Charge cards vs. credit cards: Other considerations

Now that you know the major differences between a charge card and a credit card, here are some other things to consider before choosing the right type of card for you.

• Annual fees
  

  Since the issuer is less likely to make money on interest payments for a charge card, they’re more likely to charge annual fees (although you’ll find some business charge cards, like the Brex Card*, that don’t charge an annual fee). Like with credit cards, however, charge cards often come with rewards structures that may allow you to earn back the cost of membership through spending or other benefits.

  Credit cards have annual fees ranging from $0 to well over $700. The credit cards that charge a hefty price tag tend to be premium travel cards, but they often come with numerous potential savings and perks — such as travel statement credits and airport lounge access. However, there are plenty of no-annual-fee rewards card options that offer serious value, many of which will help you earn boosted rewards on everyday spending.

• Rewards and perks
  

  Many charge cards (particularly those issued by American Express) feature top-of-the-line rewards and perks, especially for those interested in travel benefits. Plus, the flexible spending capabilities offered by many charge cards allow for huge rewards-earning potential. Still, other charge cards may feature a flat cash back rate or a rewards structure that’s dependent on meeting specific payment terms.

  That said, many credit cards offer higher rewards rates and come with more benefits than charge cards, especially for certain types of purchases.

  For example, the Chase Sapphire Reserve® is frequently considered to be one of the best travel credit cards on the market today. For a $795 annual fee, you’ll get numerous benefits, such as the following rewards rates:

  • Earn 8x points on all purchases through Chase Travel℠, including The Edit℠.
  • Earn 4x points on flights and hotels booked direct.
  • Earn 3x points on dining worldwide.
  • Earn 1x points on all other purchases.

  You’ll also get access to over 1,300 airport lounges, up to $300 in annual statement credits on qualifying travel purchases, extensive travel insurance, 1:1 points transfers to Chase travel partners and so much more.

• Accessibility
  

  In addition to a high annual fee, other barriers to entry may make charge cards less accessible for some consumers. For instance, American Express is the leading issuer of charge cards; options are somewhat limited across other issuing banks.

  With credit cards, there’s a lot more to choose from. It’s easy to find various combinations of rewards structures, benefits, fees, promotional offers, APRs and other card features that make it possible for any potential cardholder to find the best credit card to fit their lifestyle.

  In addition to the limited number of choices, charge cards require a proven history of creditworthiness. It generally requires a good credit score (usually 670 or higher) to qualify for a charge card, which can make approval more difficult for those with a less favorable credit history.

  On the other hand, credit cards are available to a broader range of applicants, including those with bad credit or even no credit history. And if an applicant can’t qualify for a traditional credit card due to bad or no credit, they may be able to qualify for a secured credit card.

• Credit score impact
  

  Both credit card and charge card accounts will report your payment history to the three credit bureaus: Equifax, Experian and TransUnion. Either card can be a helpful tool to build your credit effectively with responsible use, but charge cards have a slightly different impact.

  Here are some ways that both types of cards can affect your credit score:

  • Payment history: Both charge cards and credit cards impact multiple factors that make up your credit score. Your payment history accounts for 35 percent of your credit score, so making on-time payments with either type of card is the most important thing you can do to keep your score healthy.
  • Length of credit history: As with your payment history, both types of cards can impact the length of your credit history. This category makes up 15 percent of your FICO credit score, so consider keeping older accounts open while you continue building your credit.
  • Credit utilization: Due to their nature, charge cards impact factors such as your payment and credit history, but they do not affect your credit utilization. Because a charge card doesn’t have a preset credit limit, utilization is more difficult to determine, so scoring models generally don’t account for charge card utilization rates. With that said, credit utilization is an important factor to keep in mind if you’re using a credit card instead.
  • New credit: Regardless of whether you open a charge or credit card, lenders will likely perform a hard credit inquiry when you apply for a new card. This will have a temporary adverse effect on your credit score, although the impact is expected to be short-lived. Keep this in mind, however, if you are planning to apply for a different type of loan in the near future, such as a mortgage or auto loan.

The bottom line

Credit cards offer more flexibility when it comes to revolving credit, but that doesn’t come without its downsides. Carrying a balance on a credit card can lead to an unpleasant amount of debt without the proper discipline.

Charge cards, on the other hand, typically require payment in full each month. If you fail to pay off your balance in full, the issuer may close your account and issue a hefty fee.

It can be hard to decipher which type of card is better for you, as both charge cards and credit cards can help you build credit and earn rewards, among other things. The decision is ultimately up to you and your financial needs.

To help you choose the best card, be sure to check out Bankrate’s free CardMatch™ tool.

*The information about the Brex Card has been collected independently by Bankrate. The card details have not been reviewed or approved by the issuer.