Whether you’re shopping in-person or online, plastic cards — and their virtual counterparts — are among the most popular ways to pay for stuff. Credit cards accounted for 27% of all transactions made in 2020, and debit cards accounted for an additional 28%. That means that 55% of all purchases used plastic cards in 2020.
When you think about using a card to pay for something, you probably think about debit or credit cards. However, there is one other type worth knowing about: charge cards.
What Are Charge Cards?
Charge cards are similar to credit cards, but they have a few important differences.
Like credit cards, charge cards are plastic or metal cards that you can use to make purchases. You can use them to make in-person transactions or to make purchases online using your account numbers.
Charge cards are issued by financial institutions, just like credit cards. When you use a charge card to make a purchase, the card issuer sends the payment to the merchant. You have to pay the issuer back at a later date.
You might not notice a significant difference between credit cards and charge cards, even if you use them both. However, that doesn’t mean that the differences aren’t important.
How Charge Cards Work
For the most part, charge cards work just like debit or credit cards. You swipe the card or enter the card number online to make your purchase. Your card issuer keeps track of the balance that you’re racking up.
Each month, you’ll get a bill from the issuer requesting payment. When you pay the bill, the card issuer reports that payment to the credit bureaus and subtracts the payment from your balance.
However, unlike credit cards, you must pay the bill in full every single month. You can’t carry a balance, and any payment less than the full amount incurs late fees. Despite this difference, charge cards are still loan products and will help you build credit.
In many cases, you won’t even notice that you’re using a charge card instead of a credit card. However, there are some essential differences to keep in mind.
Charge Cards vs. Credit Cards: What’s the Difference?
Charge cards and credit cards work very similarly, but charge cards have a few unique advantages and disadvantages.
|No pre-set limit
|Issuer sets a limit and informs you of it when you receive the card
|Must pay balance in full
|Pay any amount as long as it is at least the minimum payment
|You can’t carry a balance, so no interest will accrue
|Interest accrues on unpaid balances, typically at rates exceeding 10% APR
|Fee charged for late payments
|Fee charged for late payments
|Almost all charge cards have one — typically $100 or more per year
|Many no-fee cards available, but premium rewards credit cards often have annual fees
|Perks and Rewards
|Many perks and rewards, which tend to be more generous than basic credit cards
|Can vary, with the best perks and rewards reserved for premium rewards cards
|Requires good credit or better
|Cards available for borrowers of all credit profiles
|Effects on Your Credit Score
|Payments have an impact, but balance does not affect utilization
|Payments and balance impact credit
One of the most striking differences between charge cards and credit cards is the lack of a credit limit.
Credit Card Credit Limits
When you get a credit card, the card issuer gives you a credit limit. You can spend money using the card until your balance reaches the limit. Once you’ve reached the limit, you can’t make any more purchases with the card until you’ve paid down the balance.
For example, a credit card might have a $1,000 credit limit. If you have no balance, you can use the card to buy anything up to $1,000. If you use the card to make a $300 purchase, you’ll have $700 of your credit limit remaining.
After that, if you want to make a $650 purchase, you can. But if you want to make a $750 purchase, you can’t because it will send you over your credit limit.
Some issuers might let you break your credit limit by a small amount. For example, if you have $650 left in your credit limit, the issuer might allow the $750 purchase to go through. However, this isn’t guaranteed, and there are plenty of reasons to avoid trying to go over the limit — such as overlimit fees and damage to your credit.
Charge Card Credit Limits
Unlike credit cards, charge cards don’t come with any preset spending limit.
However, that doesn’t mean that you can go out and spend as much money as you want to spend using the card. There is a limit, but the card issuer won’t tell you what it is, and it can change depending on the situation. In practice, the card issuer decides on a case-by-case basis whether or not to let a transaction go through.
That said, the amount of credit that a charge card issuer is willing to extend is often higher than the credit limits that credit card issuers give.
This gives you more flexibility when using a charge card because you don’t have to worry about whether your credit card issuer will stop you from going over your credit limit or let it slide this time. If you’re planning to make a big purchase, you can just let your charge card issuer know and make sure they’ll approve it.
Monthly Payment Amount
One of the most obvious differences between charge and credit cards is that charge cards do not let you carry a balance from month to month. You must pay the balance of your card in full each time you get a bill.
Credit cards, on the other hand, have a minimum payment amount that can be much lower than the card balance. As long as you make this minimum payment, the card issuer reports a timely payment to the credit bureaus. However, interest accrues on the unpaid balance until you pay your credit card balance in full.
Bottom line: Charge cards are less flexible than credit cards because you can’t choose to carry a balance if you need to.
Credit card interest rates can be incredibly high. Rates from about 15% to 25% aren’t unusual, though your credit rating and benchmark interest rates can have a big impact on the rate you pay.
That means that your credit card balances decrease very slowly if you only make the minimum payment each month. You could wind up spending much more with a credit card than a charge card thanks to how quickly interest accrues.
Because charge cards typically do not allow you to carry a balance, you don’t have to worry about interest charges showing up on your account. Some issuers offer a limited ability to pay for certain charges over time at a predetermined interest rate. However, for the most part, you must pay the entire charge card balance in full.
Both credit cards and charge cards bill their cardholders monthly. If you fail to pay your charge card bill before the due date, you’ll see late fees added to your next statement. Likewise, if you fail to make your minimum credit card payment by the statement due date, you’ll have a late fee on your next bill.
Failing to make timely payments can also have a negative impact on your payment history. Because your payment history is such an important component of your credit score, missing even one payment can cause your credit score to drop significantly.
Some credit and charge cards carry annual fees.
With credit cards, these fees typically apply to premium rewards cards like the Chase Sapphire Reserve card. These cards offer valuable perks, like airline lounge access, early boarding for flights, free hotel stays and room upgrades, and cash back or statement credits for certain types of purchases.
These annual fees help compensate the card issuer for providing the perks.
Less generous credit cards — for example, basic cash-back rewards cards like the Citi Double Cash card — often don’t charge annual fees. You can use these cards without paying for the privilege each year.
By contrast, charge cards almost always charge an annual fee. Most charge card issuers portray their cards as premium financial products and offer a variety of perks with them, including concierge service and travel benefits. They charge annual fees to offset the costs of those perks.
Perks & Rewards
As mentioned, charge cards almost always come with a variety of perks, even for the least premium products.
For example, some charge cards offer expedited passage through airport security screening, free or discounted access to airport lounges, and other luxe travel benefits. Many credit cards offer these benefits too, but they’re more consistently available with charge cards.
These cards might also include extended warranty protection, top-tier customer support including help with planning vacations to outings, access to cardmember-only tickets for events like concerts or theater, and car rental insurance.
Credit cards can offer similar perks and rewards. However, the best perks often only come with very premium credit cards that charge annual fees in the hundreds of dollars.
When you apply for a credit card or a charge card, the card issuer typically asks one or more of the credit bureaus for a copy of your credit report.
Your credit report contains a history of your interactions with debt and credit. It also includes a numerical score between 300 and 850 that gives lenders a rough idea of how trustworthy you are as a borrower.
Factors like a history of paying your bills on time and not having a lot of debt can help boost your score. Actions such as missing payments, having a lot of debt, or opening lots of credit card and loan accounts can reduce your credit score.
Based on your credit score and the information in your credit report, lenders decide whether to let you open a credit card or charge card account.
Typically, charge cards have more stringent credit requirements than credit cards. Charge card issuers expect you to pay the entire balance of your card every month, which is more difficult than meeting a small minimum payment like you have to do with a credit card.
Although there are premium credit cards with strict credit requirements, there are just as many that are designed for people with poor or no credit. Charge cards are almost exclusively available to people with good credit histories.
Effects on Your Credit Score
Charge cards impact your credit score in very similar ways to credit cards. Charge card issuers report your account details to one or more of the major credit bureaus, including whether you make your payments on-time.
If you use the card properly, it can help your credit. Missing payments can hurt your credit.
One place where charge cards differ from credit cards is in your credit utilization. This is a measure of your credit card balances in comparison to your credit limits.
Alongside your total debt, your credit utilization affects the “amounts owed” portion of your credit score, which determines 30% of your overall credit rating. That makes it the second-most important factor in your credit, behind your payment history. Experts recommend keeping your credit utilization under 30%.
If you have two credit cards, one with a $1,000 balance and a $7,000 limit and another with a $500 balance and $3,000 limit, your total credit utilization ratio is:
($1,000 + $500) / ($7,000 + $3,000) = 15%
Because charge cards do not have pre-set credit limits, they won’t impact your credit utilization. A high charge card balance has much less of an effect on your credit score than a high credit card balance.
Charge Card FAQs
Still wondering how charge cards work and how they differ from credit cards? These are some of the most common questions people ask about charge cards.
What’s the Difference Between a Charge Card vs. Debit Card?
The most important difference between a charge card and a debit card is that a charge card is a lending product. When you use a charge card, you’re borrowing money from the card issuer and need to pay it back.
Debit cards use money from your own bank account and won’t let you spend more than you have unless your bank allows you to overdraft.
What Card Issuers Offer Charge Cards?
There are multiple card issuers that offer charge cards, but the best-known is American Express. You can get both Amex charge cards and credit cards, so if you’re specifically interested in a charge card, check to make sure you’re applying for the right type of card.
Can You Convert a Charge Card Into a Credit Card?
In general, you can’t convert a charge card to a credit card. Some card issuers let you change from one card product to to another, but most only let you do so within the broader credit card or charge card categories. Few issuers let you swap between categories.
Is a Charge Card Right for You?
Charge cards aren’t right for everyone.
Charge cards tend to be premium products that charge high annual fees while offering perks and other incentives to entice cardholders. If you’re the kind of person who takes advantage of these perks, a charge card is a good choice.
Charge cards are also helpful if you want to be sure to avoid interest. You’re required to pay the full statement balance of a charge card at the end of each month and can’t pay interest on balances unless the issuer explicitly allows it.
On the other hand, if you want the flexibility to carry a balance, despite the high interest charges, you’re better off with a credit card. Similarly, if you want a fee-free option, you’ll likely select a credit card over a charge card. Some credit cards even offer 0% APR introductory periods, letting you carry a balance without paying interest for months or even years.
Credit cards and charge cards both help you pay for purchases without using cash. Charge cards offer slightly less flexibility by requiring payment in full each month, but they often come with premium rewards and perks that make them worth the trouble.
So if you’re looking to make the most of your travel rewards or benefits, a charge card might be the right choice for you.