What is the difference between a charge card and a credit card?
Charge cards and credit cards function in a very similar way and can both be a great tool to build credit. The main difference between a charge card and a credit card is that credit cards allow you to carry a balance from month to month, while charge cards require you to pay your balance in full each month.
There is also a key difference in the spending limit. There is no preset spending limit with a charge card, while credit cards have a credit limit. Charge cards and credit cards also have differences in credit score requirements and annual fees. However, in general, you can use a charge card just like a credit card to make purchases and to pay for those purchases at the end of a billing cycle.
Charge card vs. credit card: What are the differences?
|Pay in full each month
|Pay minimum each month
|No preset limit
|Usually good to excellent
|Available to all credit scores
|Hard credit inquiry
|Usually no APR
|There is usually an annual fee
|Some cards have no annual fee
|Some offer rewards
|Some offer rewards
|Wide range of issuers
The main difference between charge cards and credit cards is that you’ll have to pay your balance in full each month with a charge card. You’ll only need to make a minimum payment each month with a credit card.
Having to pay your balance each month can help keep you accountable and maintain a good credit score. But, if you don’t make the monthly payments you could be at risk of having your account closed. Credit cards offer a little more flexibility, though you’ll have to pay interest if you carry over a balance from month to month.
Spending limit and credit utilization
Charge cards typically don’t have a set spending limit, while credit cards have a credit limit that’s determined when you apply for the card. Note that the lack of a preset spending limit on a charge card doesn’t always mean you have unlimited spending. You’ll have a more flexible limit that is typically determined by your spending behavior, payment history and credit profile.
Since charge cards have no spending limit, your credit utilization ratio won’t be affected. A credit utilization ratio is your current debt in relation to your total available credit. You’ll typically want to keep this number under 30% to maintain a good credit score.
While there’s a set limit to how much you can spend with a credit card, there are ways to increase your credit limit. Many issuers let you request an increase online or by calling your credit card company. Some cards even offer automatic reviews to see if you qualify for a higher credit limit. You can also choose a high limit credit card that comes with a higher credit limit upfront to applicants with good credit scores.
Annual fee: You can find many credit cards with no annual fee, but you’ll likely have to pay an annual fee for a charge card because you won’t be paying interest on your card. For example, the Capital One Spark Cash Plus card has a $150 annual fee.
Late fees: You can avoid late fees with a credit by making the minimum payments on time. However, you can pay substantial late fees with a charge card if you don’t pay your full balance at the end of the month. For example, The Capital One Spark Cash Plus card requires you to pay 2.99% of the unpaid portion for a late fee if you don’t pay on time. For a $5,000 balance, that amounts to $150 in fees.
Credit score requirements
While there are credit cards for people with bad credit scores, you’ll generally need good to excellent credit to get a charge card. However, there are a few cards for bad credit that are similar to charge cards. For example, the Tomo Credit Card has no interest and requires a $2.99 per month membership fee. Like a charge card, it requires you to pay your balance in full each month. It also has the potential for a very high credit limit.
Both charge cards and credit cards require a hard inquiry. This means that the credit card issuer will request access to your credit reports. The inquiry will be recorded on your credit report and can potentially cause your score to drop. A hard inquiry won’t affect your credit score by much, however, and typically won’t stay on your credit report for more than two years.
Credit cards are much more common than charge cards and are offered by more issuers. Some issuers, like American Express and Capital One, offer a few charge cards, but charge card options will be more limited than credit cards.
If you’re looking to earn rewards on your spending, credit cards and charge cards are both good options. You can find charge cards and credit cards that offer great rewards programs.
How do charge cards and credit cards affect credit?
Credit cards and charge cards both help build credit because issuers usually report your payment history to the three credit bureaus (Equifax, Experian and TransUnion). However, your credit is less likely to be negatively impacted by carrying a balance with a charge card than with a credit card because the most recent FICO scores don’t count charge card balances toward your credit utilization. Older FICO Score models and VantageScore calculations may include balances on your charge cards.
Pros and cons of a charge card
No preset spending limit
Doesn’t affect credit utilization ratio
Must pay balance in full each month
Usually charge an annual fee
Fewer card options
Pros and cons of a credit card
Only required to pay the minimum each month
Some cards have no annual fees
Wider card selection
Preset credit limit
Can affect your credit utilization ratio
How can I get a credit card?
To get a credit card, follow these steps:
- Check your credit score to see which cards you are qualified for
- Know key credit card terms so you understand the fees of your card
- Decide which type of credit card works best for you
- Compare credit card offers
- Gather any personal information needed to apply
- Prepare for a hard inquiry on your credit
- Decide where you want to apply for your card. This can be online, in person, over the phone or by mail
- Submit your application and wait to hear if you’ve been approved
How can I get a charge card?
The process of applying for a charge card is almost identical to a credit card. Knowing your credit score will be even more important because most charge cards require good to excellent credit. The terms for a charge card will also be a little different than a credit card because you won’t have an APR.
Should I get a charge card or a credit card?
Choosing between a charge card or a credit card depends on your personal financial situation and goals. Both provide good ways to build credit and potentially earn rewards.
Credit cards are better if you’re looking for more flexibility in your payments and no annual fee options. There are a ton of options from many different credit card issuers to choose from. Many offer helpful incentives and perks. For example, if you’re making a large purchase and are worried about paying interest, you can look for a 0% APR card to help you pay it off.
If you’re comfortable paying an annual fee and your balance in full each month, a charge card might be the best choice. There are fewer charge cards, but they can save you from building up debt and interest since you have to pay your balance in full each month. Charge cards can also be a good choice for businesses that spend a lot each month since they don’t have a preset spending limit.