Charge cards and credit cards: They may look the same and work the same, but they actually have some important differences. Before you decide to apply for one or the other, it’s important to understand these distinctions. The main differences lie in the credit limit and payment terms. One requires full payment each month and has no spending cap, while the other sets a credit limit but offers more flexibility in terms of repayment. Let’s take a closer look at the pros and cons of each.
Charge card vs. credit card: Overview
| Charge Card | Credit Card | |
|---|---|---|
| Spending Limit | No cap | Fixed |
| Payment Options | Pay in full | Carry a balance if necessary |
| Fees | Late/returned payment fees, cash advance fees | Late/returned payment fees, cash advance fees, APR |
What is a charge card?
Charge cards are similar to credit cards in that they allow you to borrow money from the issuing bank to make purchases. However, charge cards have stricter repayment terms compared to credit cards.
Unlike credit cards, charge cards don’t have any specific requirements to be approved. If you can get approved for a credit card, you can likely get approved for a charge card of equal caliber.
How does a charge card work?
Charge cards used to be more popular, but nowadays, only a few banks issue them. There are a couple of unique features that may seem odd if you’re used to using credit cards.
First, charge cards don’t have a set credit limit. Instead, your spending limit may vary depending on your spending habits. This means that if you’re a big spender, your card is unlikely to decline even for large purchases. Some issuers, like American Express, even offer a tool within your online account where you can check your “spending power.”
Another unique feature of charge cards is that you’re required to pay your balance in full each month. If you fail to do so, you’ll be charged late fees and may even risk having your card closed.
Key benefits and disadvantages of charge cards
You may be able to spend more than a credit card would allow
Charge cards can be beneficial if you frequently make large purchases that you can quickly pay off. This is particularly useful for small businesses that may need to charge significant amounts of money at once, something that may not be possible with a credit card.
Your credit score will be affected differently
With charge cards, your balance doesn’t count against your credit utilization. Credit utilization is the percentage of credit you’re currently using. For example, if you have a credit card with a $10,000 credit limit and make a $5,000 purchase, your credit utilization is 50%. Credit utilization is an important factor in your credit score, with higher utilization usually resulting in a lower score. However, charge cards don’t have a stated credit limit, so the amount you owe doesn’t count against you.
You can’t carry a balance
Unlike credit cards, charge cards don’t allow you to carry a balance. If you don’t pay off your card in full each month, you’ll be charged late fees and may even have your account suspended. However, the advantage of this is that you won’t pay any interest for carrying a balance.
What is a credit card?
Credit cards are revolving lines of credit extended by banks. They offer a wide range of options for different financial goals, from building credit to earning travel rewards.
How does a credit card work?
Similar to charge cards, credit cards allow you to make purchases using the bank’s money and pay it back later. However, there are some differences in terms of repayment.
Upon approval for a credit card, you’ll be assigned a specific spending limit based on your creditworthiness. As you make purchases, your credit limit decreases. However, you have the option to pay all or part of your credit card balance and regain a portion of your credit line to use again. It’s important to note that some credit card issuers may not appreciate it if you spend more than your credit line in a month.
You also don’t have to pay off your credit card balance in full each month. As long as you make the minimum payment, you won’t risk defaulting on your account. However, it’s always best to pay off your balance in full to avoid accruing high-interest charges.
Key benefits and disadvantages of credit cards
You can carry a balance if necessary
Credit cards allow you to carry a balance from month to month, although it’s not recommended due to high-interest rates. Carrying a balance can eat into any rewards you earn through spending.
Wide variety of options
There are many credit card options available to suit different financial goals. Whether you want cashback, travel rewards, or a low introductory APR, there’s a credit card that’s right for you.
Prefixed spending limit
Credit cards have a fixed spending limit, which can affect your credit utilization. Keeping your credit utilization under 30% of your available credit can boost your credit score. However, if you have a low credit limit, you may not be able to make large purchases.
Key differences between charge cards and credit cards
Let’s recap the key differences between charge cards and credit cards:
Spending limit
- A credit card has a fixed spending limit, while a charge card doesn’t specify how much you can spend. However, there is still a limit, which can fluctuate depending on your spending habits.
Payment option
- With a charge card, you must pay your entire balance each month. Failure to do so will result in late fees and potentially a closed account.
- With a credit card, you have the option to carry a balance across multiple billing cycles. Making only the minimum payment will keep your account in good standing.
Card selection
- There are far more credit card options available compared to charge cards. Most card issuers offer credit cards, while only a few offer charge cards.
Fees
- Both charge cards and credit cards have standard fees such as late payments, returned payments, and cash advance fees. However, charge cards don’t accrue interest since you’re required to pay off your balance in full each month.
Which card is the better choice for you?
If you consistently pay off your balance in full each month, there isn’t much difference between a charge card and a credit card. However, if you’re looking for specific benefits such as cashback, travel rewards, or 0% intro APR, credit cards offer a wider range of options.
For those with limited or bad credit, there are very few personal charge cards available to build credit. Credit cards provide more options and are easier to find, regardless of your credit history.
Personal Finances Blog can help you find the credit card that best suits your needs.
TIME Stamp: The difference between a charge card and a credit card comes down to spending limit and payment terms.
While charge cards offer more flexible spending options, credit cards provide more repayment flexibility. Ultimately, the right choice depends on your financial habits and goals.
Frequently asked questions (FAQs)
How does a charge card affect your credit score?
Applying for a charge card may temporarily lower your credit score due to a hard inquiry. However, your score will increase if you use the card responsibly. Charge cards don’t have a preset credit limit, so your spending activity doesn’t affect your credit utilization.
How does a credit card affect your credit score?
Credit cards have a greater impact on your credit score than charge cards. Applying for a new credit card will result in a temporary decrease in your score due to a hard inquiry. However, your overall credit utilization will decrease, which is beneficial for your score. Responsible credit card use, such as paying bills on time and keeping your card open for a long time, can further improve your credit score.
What are alternatives to charge cards and credit cards?
If you’re not interested in charge cards or credit cards, you can consider debit cards or prepaid cards. While they don’t offer the same level of security and benefits, they are still a better alternative to carrying excessive amounts of cash.
So, now that you understand the differences between charge cards and credit cards, you can make an informed decision based on your financial goals and habits. Remember, responsible usage is key to maintaining a healthy financial life.