What Is a Charge Card?

Applying for and swiping a charge card is similar to using a credit card, but it’s often misunderstood. Unlike credit cards, charge cards require you to pay your balance in full every month and don’t have a preset spending limit.

This can let you make large purchases and improve your credit score while potentially earning rewards. But you’ll want to pay it off by the end of the billing cycle or risk a late fee. Learn more about how a charge card differs from a credit card.

What are charge cards?

A charge card doesn’t have a preset spending limit and requires payment in full every month. Purchases are approved based on your payment history, financial resources and credit records. Since charge card balances must be paid in full by the due date, there’s no interest rate or minimum payment. But there can be high late fees.

Many charge cards offer welcome bonuses, travel perks and other rewards, similar to credit cards. They may offer promotional rates, which you can lose if you fail to pay your balance in full and on time.

How do charge cards work?

Charge cards and credit cards work the same when you make a purchase — in both cases, you’re borrowing money from the card issuer to complete your transaction. However, the way you repay the issuer is different.

Charge cards typically need to be paid in full every billing cycle, so you’ll want to have the cash on hand by the due date. Not paying off a large charge card balance can be an expensive mistake. Late fees are steep, and you may end up owing a couple hundred dollars on balances over a few thousand dollars. For example, a 3 percent late fee means a past-due payment on a $5,000 credit card bill will cost you $150. You’ll continue to incur late fees every month your balance is not paid in full, and repeated late or missed payments could lead to your debt being charged off or sold to a collections agency.

Some charge cards let you revolve a portion of the debt, which creeps into credit card territory. For example, American Express offers eligible cardholders the chance to pay off certain transactions over time; however, the outstanding balance incurs finance charges that charge cardholders wouldn’t incur if they paid off their balance in full.

Since most charge cards come with no predetermined spending limit, they can be a good option when making big purchases. But you’ll still want to take care to maintain a good credit history, as credit issuers keep a close watch on any over-the-top spending.

Charge cards vs. credit cards

The terms “charge card” and “credit card” are often used interchangeably, but they’re not the same.

Charge cards don’t charge interest, because payment is typically required in full at the end of every billing cycle, so there’s no carried balance on which to assess interest. Instead, late payments will incur late fees.

On the other hand, credit cards offer revolving credit, which lets you continuously borrow money and pay it back over time. You can carry a balance, but it will likely accrue interest at a high rate. If you don’t make the minimum payment on time, you may also incur a smaller late fee. 

If you can pay your balance in full, using both types of cards will feel similar. Your spending power is likely to be higher with a charge card, though the best credit cards typically offer more rewards options and the ability to pay off a purchase over time with a 0 percent intro APR, if needed.

How do charge cards affect your credit score?

There are several factors to your credit score, and a charge card affects all but one of them — credit utilization.

Charge card issuers report on-time or late payments to the credit bureaus, and that payment history is the largest factor in your score. Your credit age, credit mix and new credit will also be impacted by a charge card, including when you open the account and how long it stays open.

But because charge cards don’t have preset spending limits, they don’t usually count toward your credit utilization ratio — which measures how much available debt you’re using. VantageScore and FICO tend to exclude charge card balances from their credit-scoring models for this reason.

We believe that the majority of scores that are being used out there currently exclude charge cards from utilization.

— Barry Paperno
Former consumer operations manager for myFICO Forums

Generally speaking, experts recommend keeping credit card utilization ratio below 30 percent to help your credit score. So, if you plan to make a big purchase, you could use a charge card instead of a credit card to have less of an impact on your credit score.

Which issuers offer charge cards?

Most financial institutions have phased out charge cards and focused on credit cards. But a few card issuers still offer charge cards, including:

The bottom line

Charge cards function similarly to credit cards, except they require you to pay off the balance in full every billing cycle. If you use a charge card responsibly, it can positively affect your credit score — except when it comes to credit utilization, because there’s generally no set credit limit.

You don’t have to worry about interest with a charge card, but watch out for late fees on missed payments. Whether you choose a charge card, credit card or both, it’s best to avoid overspending and always pay on time to build a positive credit history.