Credit Cards vs. Charge Cards: What Are The Differences?

If you pit credit cards vs. charge cards you’ll find that although they are similar, they have a few key differences, most notably that you won't be able to carry a balance with a charge card. While they're not as popular as credit cards, they could potentially bring value to you as a consumer. Keep reading to learn more about the differences between credit cards and charge cards. 

How does a charge card work?

Overall, charge cards are a lot like credit cards. They function and are used in the same way to make purchases, but with a major difference. Charge cards have to be paid off in full each month, while credit cards do not. Therefore, you won’t have a credit limit with a charge card, as you’ll be required to pay off any amount you spend. Since you don’t roll over your balance from month to month, charge cards don’t offer 0% APR offers or balance transfers. Charge cards may help prevent overspending as cardholders know they’ll have to find the full amount each month, rather than just the minimum payment. 

Differences between charge cards and credit cards 

Below are the key differences between charge cards and credit cards. 

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Payments: The biggest difference between charge cards and credit cards is in how they are paid off. Any balances on charge cards must be paid off in full each month. If you don’t pay off your balance your card could be canceled. On the other hand, credit card balances can be rolled over month to month, with the option of just making a minimum payment.

Credit limit: Charge cards do not have a credit limit associated with them, as they have to be paid off month to month. However, card issuers can set spending limits (that are subject to change) based on your income, spending habits and payment history, so this doesn’t necessarily mean you can spend an unlimited amount. Most credit cards have set credit limits that, typically, don't change often.

Credit score requirements: To be approved for a charge card, you’ll likely need to have at least a  good credit score, which is a minimum FICO score of 670 or a VantageScore of 661. Required credit scores for traditional credit cards vary between cards. Some cards require excellent scores, while others are geared toward consumers with bad credit scores and/or limited credit history. 

Credit score impact: Payment history for both charge cards and credit cards is reported to the three main credit bureaus (Equifax, Experian and Transunion). However, charge cards, unlike credit cards, will not affect your credit utilization (the percentage of debt you are using relative to your debt limit). This is because charge cards don't have a defined credit limit. Credit cards will affect your credit utilization, and therefore overall credit score, so bear that in mind if you plan on carrying a balance. 

Interest rates: Since you won’t be able to carry a balance with a charge card, you’ll avoid having to pay any interest charges. If you do carry a balance on a traditional credit card, you’ll be subject to interest charges based on whatever your card’s APR is.  

Fees: Most of the time, annual fees for charge cards are expensive, ranging from $150 to $695 in some cases. Credit cards, on the other hand, offer a wide range of cards with various fees. In fact, there are many no-annual-fee credit cards on the market that still offer beneficial rewards.

Although you won't accumulate interest when using a charge card, you will be subject to hefty late fees just as you are when using a credit card.

Availability: While there are hundreds of credit cards on the market, options for charge cards are pretty slim.  

Pros of charge cards

• No preset credit limit: If you plan on making a large purchase, using a charge card can be beneficial. You won’t be constrained by a preset credit limit or negatively impact your credit utilization and in turn your credit score. 
• You'll avoid debt and interest: Since most charge cards require you to pay off balances in full each month, you’ll be able to avoid debt and accumulated interest. 
• Rewards: Like credit cards, charge cards also offer rewards programs and added benefits.

Cons of charge cards

• Expensive fees: If you fail to pay off the balance on your charge card in full every month, you'll be subject to expensive late fees. With a credit card, you can easily avoid these fees by just making the minimum monthly payments. Plus, annual fees associated with charge cards are usually pretty hefty as well.
• You'll need good credit: To be approved for a charge card, you'll need to have a credit score of at least 670 as measured by FICO, or at least 661 as defined by VantageScore. People with a bad credit history are unlikely to be approved.

How to choose between a charge card or a credit card

Whether or not you opt for a charge card or traditional credit card depends on your specific financial needs.

With a charge card, you won’t be able to carry a balance, but with a credit card, you can. Because of this, credit cards offer more flexibility than charge cards, giving you more time to pay down expensive purchases. However, credit cards don’t always have the spending power that a charge card does, so if you think you might be hindered by a credit limit, a charge card may be a better choice. 

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