Charge cards allow you to make purchases and earn rewards similarly to a credit card – but in general you won’t be able to carry a balance on a charge card. Here are the pros and cons of charge cards, and how to decide whether a charge card is right for you.
Charge cards and credit cards offer two very different ways to pay for purchases. While you might be familiar with the basics of revolving credit cards, a charge card may be completely new territory.
If you’re wondering whether a charge card belongs in your spending toolbox, these tips can help you understand how they work.
See related: Best charge cards
A 7-step guide to charge cards
What is a charge card?
A charge card is similar to a credit card, in that you can use it to make purchases. Some charge cards also allow you to earn rewards. But that’s where the similarities end.
“Charge cards are a specific kind of credit card that has no preset spending limit,” says Logan Allec, a CPA, personal finance expert and owner of personal finance blog Money Done Right.
No preset spending limit isn’t the same thing as having no credit limit at all. Instead, it means that your purchasing power may fluctuate from month to month, based on your account activity, spending habits and creditworthiness.
How charge cards work
The mechanics of making purchases with a charge card are essentially the same as a traditional credit card.
You present your card at checkout in stores or enter your card details when making purchases online. The transaction is charged to your card and posted to your account.
Where the two diverge is in how you pay those purchases off.
“A credit card has a line of credit with a limit that you can borrow from and pay down with installments or in full – the choice is yours,” says R.J. Bryan, co-founder of Credit Reps. “A charge card can be borrowed from but must be paid in full at the end of the month.”
Since balances are paid in full, charge cards don’t charge interest on a monthly basis the way a regular revolving credit card would. Charge cards can, however, charge interest for cash advances or a penalty APR if you pay late. They can also carry annual fees, cash advance fees, late payment fees and foreign transaction fees, similar to credit cards.
Advantages of charge cards
In terms of benefits, there are several things to like about charge cards.
Kevin Chen, credit cards writer for Finder, says no preset spending limit can offer flexibility if you need to have more or less buying power from month to month. With a traditional credit card, credit limit increases are typically something you have to request.
A charge card can also be useful in developing good credit habits.
“It may also help you with financial discipline, as you typically won’t be able to carry a balance and accrue interest,” says Chen.
Using a charge card means you have to be mindful of what you spend since you’ll have to pay it off at the end of the month.
Aside from those advantages, charge cards can also be rewarding in other ways, says Allec. That includes being able to earn rewards on purchases and enjoy other card perks such as travel or shopping benefits.
Earning rewards can save you money if you apply them as a statement credit against purchases, redeem for travel or have cash deposited into a bank account. No purchase APR means no interest charges detracting from your rewards’ value.
Disadvantages of charge cards
What makes charge cards an attractive option for flexible spending can also be a downside for some users.
Bryan says charge cards are good for people who know they’ll be able to pay the balance in full at the end of the month. But that requirement could work against you if your spending isn’t always predictable or you have inconsistent income from month to month.
High annual fees can also be problematic, says Allec. Even though you’re not paying interest, you may not be able to escape an annual fee. You could make up for it by earning rewards on purchases or taking advantage of the benefits offered by the card, such as travel credits or airport lounge access.
However, the higher the fee, the more you may have to spend or travel in order to offset the cost.
See related: Best travel credit cards
Who offers charge cards?
If you’re looking for a charge card for personal or business use, American Express is the go-to option.
American Express currently offers these charge cards:
- American Express Centurion Card
- The Plum Card® from American Express
The Centurion card can be issued as a personal, business or corporate card.
Six Amex cards formerly considered charge cards – American Express® Gold Card, American Express® Green Card, The Business Platinum Card® from American Express, Business Green Rewards Card from American Express and The Platinum Card® from American Express – now come auto-enrolled with Pay Over Time, an Amex feature that allows you to pay eligible purchases of $100 or more over time.
This means cardholders can now choose to pay their statement balances in full or carry a balance with interest on eligible charges, up to their Pay Over Time limit.
If you’re eligible for Pay Over Time, which is available with the business and personal versions of the Gold and Green cards and the Business Platinum card, read the fine print on the repayment terms. Specifically, check the APR and repayment terms so you know how much paying over time might cost.
How do charge cards affect credit?
Any time you’re using credit, it’s important to consider the impact to your credit scores. Once again, charge cards and credit cards differ.
“Since charge cards don’t have a credit limit, they aren’t factored into your credit utilization ratio like credit cards,” says Allec.
After payment history, credit utilization – meaning the amount of available credit you’re using – is the second-most important factor in credit scoring.
That means charge cards have less impact with regard to your total balance. But they’re still important when it comes to payment history. Making payments on time each month can work in your favor while paying late can damage your credit, says Allec.
They also affect other credit scoring factors, such as credit age and credit mix, says Bryan. And each time you apply for a charge card, a new hard inquiry could cause your score to dip slightly.
Should you get a charge card?
Whether it makes sense to have a charge card in your wallet depends on how you spend, the kind of rewards or perks you’re after and what you’re comfortable paying for an annual fee.
“If the fees of your charge card outweigh the rewards, then it’s just not worth it,” he says.
Perhaps most importantly, consider how you typically spend and how disciplined you are when it comes to paying in full each month. If you’re already doing that with revolving credit cards, then it may not be much of a stretch to do it with a charge card. On the other hand, you could end up in financial hot water if you charge more than you can pay off in a given month.
Reviewing your typical spending and payment patterns for the previous six months to a year can give you some perspective. If you decide to open a charge card account, remember that it’s not an unlimited spending pass.
“Use it wisely, never use what you aren’t certain is coming in because, unlike credit cards, you can’t pay in installments,” says Bryan.