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Credit Cards

Charge Card vs. Credit Card? Know the Differences

Updated Sep 21, 2021   |   7 mins read

People often use the terms “charge card” and “credit card” interchangeably, but they are technically unique. Although it may not seem to matter, it is important to understand the differences and similarities between the two so you can make sound financial decisions.

If you want to use a card to pay for purchases you make, you have a choice between a charge card or a credit card. Both types of cards allow you to pay for your purchase later versus paying with cash, but there are major differences between the two which you should be aware of.

Before you apply for either a charge card or a credit card, you need to understand how both types of cards work so you can decide which one is right for you. This guide to charge cards vs. credit cards will help you make a fully informed decision based on your financial situation.

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What is a Charge Card?

A charge card is a card you’re issued that allows you to defer payments for purchases. However, you cannot carry a balance on a charge card. When you receive your statement, you have to pay the balance in full by the due date — otherwise, you could face big fees and lose the card itself.

Charge cards also work differently than credit cards in that there’s no maximum spending limit on the card, which typically charges substantial annual fees. For years, numerous companies in the United States offered a charge card, but today, the only major issuer left is American Express.

>> Read More: Best American Express credit cards

What is a Credit Card?

Like a charge card, a credit card is used to make purchases you can pay for later instead of paying in cash at the point of sale. You have the option of paying the balance owed in full each month or paying via installments. If you choose to let a balance carry over from month to month, you are charged interest on top of the remaining balance.

Credit cards usually come with a predetermined credit line. For example, you may have a card with a $5,000 limit. You’re only allowed to charge up to $5,000. As you pay back the card, you can keep charging on it — but you can’t exceed that $5,000 limit without triggering penalties, such as an over-the-limit fee.

All four major card issuers offer credit cards, as do many banks, credit unions, and individual retailers.

Differences Between a Charge Card and Credit Card

There are many big differences between charge cards and credit cards:

  • Repayment requirements: You must pay your balance in full each month on a charge card. If you don’t pay the full amount, you’ll face hefty penalties and your charge card could be canceled. There’s no requirement to pay your credit card statement in full each month. You only need to make a minimum payment to stay current, although carrying a balance on a credit card can get expensive, depending on your interest rate.
  • Interest charges: Credit card interest is charged on rolling balances over billing cycles if it isn’t paid in full. Since the balance on a charge card requires payment in full for each billing cycle, there are no interest charges.
  • Preset spending limit: You’re limited in the amount you can spend on a credit card. You can’t charge more than your available credit limit, which is determined based on your income, credit score, and other financial factors. With a charge card, you can charge as much as you want as long as you’re able to pay your balance in full every month. (Having no preset limit does not mean a person can spend any amount of money they want with a charge card; financial institutions have the right to refuse purchases as they see fit.)
  • Fees: Some credit cards charge an annual fee, but you can find plenty of credit cards that don’t. (Read More: Best no annual fee credit cards) However, most charge cards charge annual fees, and sometimes, the fee can be quite high. Both credit cards and charge cards charge late fees if you make late payments.
  • Card choices: You have many choices if you want to find the best credit card since so many card issuers offer them. Because Amex is the only charge card issuer remaining, your options are much more limited.
  • Credit required: Charge cards usually require good to excellent credit, while consumers with even below-average credit might still qualify for a credit card.

Similarities Between a Charge Card and Credit Card

There are also some similarities between charge cards and credit cards:

  • Both help you build credit: Your payment history with both charge cards and credit cards will appear on your credit report. So long as you make your payments on time and follow your cardholder agreement, you can build your credit history by using either.
  • Both allow you to make purchases easily: Credit cards and charge cards both fit in your wallet and are accepted by most merchants worldwide. However, American Express cards — both Amex charge cards and credit cards — aren’t accepted by quite as many merchants as Visa and MasterCard because Amex charges merchants higher fees.
  • Both allow you to pay later: With both credit cards and charge cards, you don’t pay cash right away for purchases; you pay with the card and receive a statement later telling you the amount due. Although you have to pay your charge card balance in full when the statement comes, you’ve still deferred payment for days or weeks after the purchase depending on your billing cycle.
  • Both can offer perks: Both charge cards and credit cards can offer rewards and perks, such as cash back, travel benefits, free access to your FICO score, and much more. Such benefits vary by card, so check with your card issuer to find out how your spending is rewarded and what bonuses you get for being a cardholder.

There are circumstances when credit cards are the right choice, but others in which a charge card may make more sense. You’ll need to consider your own financial situation when choosing between the two.

If you’re confident you can pay off your balance in full each month, don’t want to pay interest, and prefer a card without a preset spending limit, you should choose a charge card. Just make sure the annual fee is affordable.

If you think you’ll want the option to pay over time — or you like more choice in your credit card issuer, terms, and benefits — you should opt for a credit card instead. Because you’ll be assigned a spending limit, you may not be able to use this card for very large purchases.

Bottom Line

Although often confused with each other, charge cards and credit cards definitely aren’t the same — and it’s important to know the key differences between them so you can get the right type of card for you.

Because most credit cards offer more choice when it comes to rewards programs and flexibility, you might want to opt for a credit card but pay it in full every month like a charge card, essentially giving you the best of both worlds.

>> Read More: How do credit cards work?