Many people use the terms "credit card" and "charge card" interchangeably. "No preset spending limit" is sometimes thrown into the mix. And while these cards have many similarities, they aren't the same.
How you swipe your card when making a purchase won't change, but there are big differences between a credit card vs. charge card regarding your bill and your credit report. Here's a closer look at the differences between these cards.
Related: How your credit scores work
What is a charge card and how does it work?
When you make a purchase, a charge card works exactly like the credit cards you're used to: you pay with the card instead of cash and receive a statement from your bank each month.
However, a charge card typically requires you to pay your bill in full each month. Not doing so can lead to significant costs, such as late payment fees and a penalty annual percentage rate (APR).
Charge cards are also known as no preset spending limit cards. However, this doesn't mean you have unlimited spending capacity. Instead, your spending limit will evolve based on your payment history, creditworthiness, relationship with the bank and other factors.
While some issuers offer the ability to carry a balance by enrolling in a feature like American Express's Pay Over Time, these cards are designed for you to pay the balance in full each month, not carrying a balance forward.
Ideally, you should pay your cards off in full each billing cycle since carrying a balance leads to interest.
What's the difference between charge cards vs. credit cards?
There are additional differences between charge cards and credit cards, aside from the ability to carry a balance or make minimum payments.
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Credit limits
The most obvious difference is that a charge card has no preset spending limit. A credit card has a pre-defined spending limit. You may hear this called a "credit limit." For example, if your credit card has a credit limit of $10,000, you can't spend past that until you pay your bill.
A charge card, with no preset spending limit, has no fixed value for your spending capacity. As explained above, your spending limit fluctuates.
However, this doesn't mean you have a free pass to spend irresponsibly. Even with a charge card, you should only make purchases you know for certain you can afford.
Interest rates
Your credit card will clearly tell you the interest rate. You'll pay interest on any balance you carry from month to month. This is your APR, which can be a fixed or variable rate.
Charge cards, on the other hand, are designed for full payment. You may receive an offer to enroll in a payment plan, allowing you to carry a balance and pay the APR outlined in the offer. Barring this exception, your card issuer expects you to pay 100% of your monthly balance.
If you don't, you could encounter several adverse outcomes:
- Penalty APR/increased interest rates
- Late payment fees
- Inability to use your card until the balance is paid off
Thus, you may not find clearly advertised information about interest rates on charge cards, given that the issuer doesn't expect you to carry a balance.
Late fees
With a credit card, your monthly statement lists a due date and minimum payment amount. You won't pay a late fee as long as you meet that requirement.
However, you may have a late fee with a charge card if you don't pay your full balance by the payment due date. Making a minimum or partial payment won't satisfy the payment requirement unless you've received an offer to enroll in a payment plan to carry a balance.
Related: How to avoid late and overdraft fees
Rewards and perks
There's no difference between credit cards versus charge cards here. You can earn points and miles on both types of cards. Both types of cards can have an annual fee, as well.
However, the variety of reward offerings on credit cards vastly exceeds the variety available with charge cards. Cards with no preset spending limit fall into three basic rewards categories:
- Points in the issuer's currency, e.g., American Express Membership Rewards points
- Cash-back
- Discounts with a particular gas station brand
You can find both personal and small-business charge cards on the market. Unfortunately, you won't find charge cards offering hotel points or airline frequent flyer miles. The number of charge cards available and the rewards they earn have much less variety than the overwhelming number of credit cards you can choose from.
Recommended credit score
With a wider range of card types, reward offerings and annual fee structures on credit cards, there also are more options for those with poor and fair credit.
It's possible to earn rewards with a secured credit card or cash back on a card like the Capital One Quicksilver Cash Rewards Credit Card, which provides 1.5% cash back on every purchase.
Conversely, you'll need a higher credit score to be approved for a card with no preset spending limit. Generally, you'll want to have a credit score of 670 or higher before applying for a charge card.
Credit utilization
Credit utilization makes up 30% of your credit score. With credit cards, utilization compares how much you owe (debt) to your spending power (credit limit). For example, if your credit limit is $10,000 and your statement balance is $1,000 this month, your utilization is 10%.
Since you can't divide by 0, charge cards have no utilization rate. That's because they don't have a preset spending limit or credit limit.
Should I get a charge card or a credit card?
To decide which type of card is best for you, consider these questions:
- Will you pay the balance in full each month? If the answer is "no," consider a credit card. Specifically, consider cards offering 0% introductory APR if you need to carry a balance while financing a large purchase.
- Do you have other charge cards and credit cards? This question is important for determining your eligible cards with each issuer. For more details, consult our guide to credit card application rules and restrictions.
- What type of rewards are you looking for? Do you want transferable points or cash back? If you want perks with a particular airline or hotel, consider a cobranded credit card instead of a charge card.
- Are you looking for a small business or personal card? Ensure you are looking at the right type of card.
After answering these questions, you can choose the card that's right for you.
For most consumers, the distinction between a credit card vs. charge card isn't meaningful. However, it's important to ensure you are eligible for a card before applying, that it earns the type of rewards you want and that you won't be penalized for using the card incorrectly (such as not paying the balance in full).
Bottom line
You may have a charge card without realizing it.
There's no difference between applying for a charge card or credit card and using them for purchases feels the same. The main differences are how they affect your credit score and how you pay your bill.
Related: How to choose the best credit card for you
Editorial disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.
