The difference between charge cards and credit cards

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 Amex actually offers a wide variety of both 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 are different from credit cards.

How does a charge card work?

The main difference between a charge card and a credit card comes down to how you make payments. With a charge card, you have to pay off the entire balance you have charged on the card at the end of each billing cycle. With a credit card – on the other hand – 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).

Since you pay off your balance every month, charge cards do not come with a pre-set interest rate. Additionally, you won’t have a pre-determined credit limit. 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 by the end of the month and typically does not affect your ability to use the card for large purchases.

Charge cards and credit scores

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

FICO credit scoring factors

Factor	Percentage of credit score	Do charge cards affect it?
Payment history	35%	Yes
Credit utilization	30%	No
Length of credit history	15%	Yes
New credit	10%	Yes
Credit mix	10%	Yes

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

See Related: How Do Charge Cards Affect Your Credit Score?

Plus – since you have to pay your bill on time – charge cards can have a positive effect on your payment history. Charge cards can also positively affect the length of your credit history if you’ve had one open for a significant amount of time.

Is a charge card right for you?

Once you understand just 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.

See Related: Business charge cards vs. business credit cards: Which is best for your business?

Pros of carrying a charge card

• Charge cards often include generous rewards as well as top-notch travel benefits and protections.
• You won’t build up card debt as you won’t be able to carry a balance month to month.
• You aren’t charged interest unless you take out a cash advance, so you’ll only have to pay back what you charge.
• It won’t harm your credit utilization ratio even if you use the card for larger purchases.

Cons of carrying a charge card

• Qualifying for a charge card can be more difficult than qualifying for a credit card as they often have great rewards and the issuer’s risk is high.
• You can’t carry a balance from month to month which limits your ability to use the card for big purchases.
• You might pay steep fees for missing a payment, and your debt will be reported to credit bureaus, damaging your credit score.
• It won’t improve your credit utilization ratio by increasing your credit limit, since charge cards don’t assign such a limit.
• Fewer issuers offer charge cards than offer credit cards. Most charge cards are issued by American Express, which isn’t accepted as widely by merchants as Visa or Mastercard cards.

Our favorite charge cards

If paying off your balance every month matches your spending patterns, then a charge card could be a great choice for you – as long as its rewards program and benefits meet your needs. Here’s a quick look at two of our favorite charge cards and the types of cardholders they are best suited for.

	The Platinum Card® from American Express	American Express® Gold Card
Rewards rate	5 points per dollar on flights booked directly with airlines or with American Express Travel 5 points per dollar on prepaid hotels booked with amextravel.com 1 point per dollar on general purchases Terms apply	4 points per dollar at restaurants worldwide 4 points per dollar at U.S. supermarkets (on up to $25,000 in purchases per year, then 1x) 3 points per dollar on flights booked directly with airlines or amextravel.com 1 point per dollar on other purchases Terms apply
Welcome bonus	60,000 points if you spend $5,000 in first 3 months	35,000 points if you spend $2,000 in first 3 months
Annual fee	$550	$250
Other things to know	Free airport lounge access $200 airline fee credit for incidental purchases Up to $200 per year in Uber credits Hilton Honors gold status	$100 airline fee credit for incidental purchases Up to $120 per year in dining credits with participating restaurants Free ShopRunner membership
Who should get this card?	Frequent travelers who will take advantage of lounge access and other luxury travel benefits. Cardholders looking for generous statement credits for travel purchases. Hilton hotel loyalists hoping for a shortcut to elite status.	Cardholders who spend a significant amount on restaurant and U.S. supermarket purchases. Frequent travelers who will take advantage of insurances and travel credits. Cardholders who often shop online and can benefit from free, two-day shipping through ShopRunner.

Final thoughts

Carrying 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 are the kind of cardholder who pays off your balance in full each month, the kind of rewards and benefits the card offers might be the deciding factor between a charge card or a credit card.