What's the Difference Between a Charge Card and a Credit Card

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If you're looking for a way to build credit, earn some rewards, and make purchases without having to pay for them until later, then either a charge card or a credit card might work for you. Both charge cards and credit cards offer similar advantages.

But while some may use the two terms interchangeably, or think they are the same thing, there actually is a big difference between a charge card and a credit card. While both allow for purchases to be made with deferred payments, these cards actually have big differences in how those payments are handled.


How the Cards Handle Purchases

Credit Card: When you receive your credit card, you will notice a bunch of fine print. In that fine print (which due to the Credit CARD Act of 2009 is much bolder these days) you will notice that you have a spending limit. Over time that limit may increase, but you can't charge more than your spending limit. Essentially, a credit card gives you a short term loan on your purchases.

Charge Card: When you receive your charge card, you will notice a bunch of fine print. What you won't notice, however, is a spending limit. A charge card opens things up drastically so that you don't cap out on your spending in any given month. Effectively, a charge card also gives you a short term loan on your purchases, but it's uncapped. Which, if you're not careful with your spending, could be dangerous.


How the Cards Must be Paid Off

Credit Card: After your billing cycle ends, you will get a paper or electronic bill. In that bill you will notice your APR (the interest rate you will be charged on any unpaid portion of the bill), a due date, and some other details. You can choose to pay just the minimum, some of the bill, or the entire bill. Basically with a credit card, you have the option to revolve your outstanding balance if you so choose. It all depends on whether you are comfortable being charged interest on your purchases.

Charge Card: When the billing cycle ends on your charge card just the same as you would with a credit card. On that bill you will notice that you have a due date and a few other details. Try as you might, you won't find an APR. With a charge card you are expected to pay the entire bill by the due date. You cannot defer payments further or revolve your account. Late payments or insufficient payments can incur some pretty hefty fees.


How the Cards Report to Credit Agencies

Credit Card: One of the big factors when FICO determines your credit score is how much of your credit you're using each month. Since you have a limit on your credit card, it's easy to determine the percentage of your limit that you're charging (if you use 99% of your limit every month, you're a higher risk than if you only use 9%; thus your score is hurt with a higher percentage used). As a general rule, you don't want to use over 30% of your limit any given month. Those with the best scores, generally use less than 10% of their limit.

Charge Card: Since a charge card does not have a limit, are you using 0% or 100% every month? Actually, you're using NA%. With a charge card, this equation isn't factored into determining your FICO credit score. Instead, your payment history, length of credit, and a few other factors are more heavily weighted.


Why Would You Want a Charge Card over a Credit Card?

Both a charge card and a credit card let you purchase items and pay for them later. You can choose a rewards card in either style, and certain cards (charge or credit) have annual fees. The big differences are whether your spending is capped, and when you have to pay for your purchases.

If you don't spend a lot each month, that is under 30% of your credit limit, then a credit card is in your best interest. It allows flexibility if for some reason you can't pay it off in full one month, you can always pay it off the next month.

If you do spend a lot each month, where you would be consistently going over the 30% limit on a credit card, then a charge card is in your best interest. As long as you are able to pay it off in full, then you have a bit more flexibility.

Now the decision comes down to which card offers the best rewards to suit your lifestyle.

Find The Right Credit Card.