Charge card vs. credit card: What’s the difference?

Though charge cards and credit cards share many of the same characteristics, the two operate differently when it comes to payments and credit reporting. Unlike traditional credit cards, charge cards do not allow users to carry a balance from month to month. On the plus side, they often come with top-tier rewards and benefits.

American Express is probably the most well-known charge card issuer, but it actually offers a wide variety of charge cards and credit cards. So, how do you know which is best for you?

The first step to deciding whether you should apply for a charge card is understanding how they work and how they differ from credit cards.

Major differences between credit cards and charge cards

Let’s take a look at some of the key differences between credit cards and charge cards so you can choose which one is best for you:

Payments

The main difference between a charge card and a credit card comes down to how you make payments. If you use a charge card, you have to pay off the entire balance at the end of each billing cycle. If you use a credit card, however, you only have to pay the minimum balance each billing cycle, and you have the option to carry the rest of your balance from month to month (and build up interest by doing so).

Interest rates

Since you pay off your balance every month, charge cards don’t come with a preset interest rate or predetermined credit limit like credit cards do. Instead, each transaction is approved on a case-by-case basis. This is meant to help deter cardholders from spending more than they can pay at the end of the month but it doesn’t typically affect your ability to use the card for large purchases.

Credit scores

Because charge cards work a bit differently from credit cards, they have a slightly different effect on your credit score. Most notably, charge cards don’t factor into your credit utilization ratio (the amount of debt you have divided by your overall credit limit) because they don’t come with a credit limit.

However, your charge card issuer still reports your balance to the credit bureaus, so information about how much you spend is visible to lenders.

And because you have to pay your bill on time, charge cards can have a positive effect on your payment history, which counts for 35% of your FICO score. In addition, a charge card can positively affect the length of your credit history if you’ve had one open for a significant amount of time.

Using a credit card responsibly can help improve your credit score, but you can also harm your score if you miss payments or increase your credit utilization ratio.

Should I get a charge card or a credit card?

Once you understand how a charge card works, you can decide if it makes sense for your needs. Beyond the effects on your credit score, there are several factors to consider when deciding if a charge card is better suited for your lifestyle than a credit card.

• Earn rewards: Charge cards often include generous rewards as well as top-notch travel benefits and protections. Credit cards also offer rewards to cardholders, so the two types of cards are similar in that area.
• Avoid debt: If you don’t want to accrue credit card debt, a charge card will give you some peace of mind because you can’t carry a balance on it.
• Avoid paying interest: A charge card is a better fit than a credit card if you’re looking to avoid interest. Unless you take out a cash advance on a charge card, you’ll only have to pay back what you charge.
• Keep your credit utilization ratio low: You can keep your credit utilization low with a credit card as long as you don’t carry a balance. But with a charge card, you won’t raise your utilization rate even if you use it for larger purchases because charge cards don’t come with credit limits.
• Have an easy time qualifying: Qualifying for a charge card can be more difficult than for a credit card as they often come with great rewards and the issuer’s risk is high.
• Don’t carry a balance: You can’t carry a balance from month to month with a charge card but that does limit your ability to use one for big purchases. You can carry a balance with a credit card but if you pay off your purchases in full each month you can avoid it completely.

Bottom line

Using a charge card is a great way to avoid racking up a large balance or significant interest charges. On the downside, it doesn’t benefit your credit utilization ratio and qualifying can be a bit more difficult. If you’re the kind of cardholder who pays off your balance in full each month, the kind of rewards and benefits you’ll get might be the deciding factor when choosing to go with a charge card or a credit card.