Difference Between Credit Cards and Charge Cards

The key: Credit cards let you carry a balance from month to month, while charge cards require you to pay in full each month.
Gregory Karp
By Gregory Karp 
Edited by Paul Soucy

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The defining difference between credit cards and charge cards lies in your ability to carry a balance — that is, roll debt over from one month to the next. Traditional charge cards don't let you do that; you must pay the balance in full every month. Credit cards let you pay for purchases over time, usually with interest.

Charge cards are quickly becoming a relic. American Express was the last major issuer of charge cards in the U.S., but even those cards now allow you to pay for certain purchases (but not all) over time. Still, charge cards do have some benefits. Let's run down the differences between charge cards and credit cards and see which ones work to your advantage and which don't.

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How charge cards work

Charge cards look like credit cards and function the same way to make purchases. They often have some of the same features, including rewards and perks. But they’re designed to be paid off immediately. Therefore, they don't have 0% interest promotions, and they're not an option for balance transfers.

Some retailers offer charge cards for use at their own stores, although in many cases those have been replaced by credit cards.

Advantages of charge cards

No preset spending limit

Charge cards generally have no preset spending limit. That can be an advantage if you need to make a large purchase. With a credit card, one big purchase could bring you so close to your credit limit that your credit score takes a hit.

Having no predetermined spending limit sounds enticing, especially for big spenders and business owners. But it’s worth looking at the fine print.

"No preset spending limit" doesn’t mean "unlimited spending allowed." It just means the limit changes. You will still have limits based on your use of the card, payment history, credit record, financial resources and other factors. Cardholders can check their spending limit to find out instantly whether purchases will be approved, either online, with the mobile app or by calling the phone number on the back of the card.

By contrast, credit card accounts have a set limit that changes infrequently.

No debt and interest

With a traditional charge card, you can’t get into debt because you’re required to pay it off every month. This also means there are no interest charges. That could be viewed as a benefit because of the built-in discipline.

Rewards and perks

Charge cards may come with generous spending rewards and built-in perks, especially for travel.

However, stiff competition among credit cards made some of them comparable to or even better than charge cards. For example, the Chase Sapphire Preferred® Card is a feature-packed travel credit card that compared favorably with American Express's charge cards.

Impact on credit scores

Used responsibly, charge cards and credit cards can both help you build your credit.

One difference is that new scoring models don’t consider charge card balances for a portion of their scoring criteria, called credit utilization. Utilization refers to how much of your available credit you’re using at a given time. Because charge cards have no preset spending limit, scoring models can’t calculate that ratio.

So one advantage of a charge card is you can spend as much as you want during a given month, and it won’t hurt the utilization element on your credit scores.

How charge cards can trip you up

Steep late fees

If you fail to pay your required monthly balance in full, you will probably incur a late fee, which can be as bad as credit card finance charges.

Most credit cards charge late fees, too — although some don’t. The difference is, you can make the minimum payment to avoid a late fee. With a charge card, you have to pay the whole balance to avoid a late fee. That makes charge cards less flexible when it comes to making payments.

And, of course, a charge card issuer can report late payments to the credit bureaus, which can damage your credit, just like a credit card issuer can.

High annual fees

Charge card rewards and perks come at a price — an annual fee. Some are steep. Some of American Express's charge cards had fees in the hundreds of dollars. By contrast, many credit cards have no annual fee, although cards that match the rewards and travel perks of charge cards generally have similar annual fees.

Credit needed

Charge cards require good to excellent credit — meaning a score of 690 or higher — while some credit cards will approve you for an account if your credit is less than stellar.

How to choose between credit cards and charge cards

NerdWallet recommends paying off your card balances in full every month. If you do, charge cards and credit cards aren't very different; the major distinction is that you could have greater spending power with a charge card. So judge the cards on their features.

All else being equal, most people should choose their plastic from the realm of credit cards. They offer more choice and flexibility than charge cards, both when choosing a card and using it. Besides, you can always use a credit card like a charge card simply by paying your balance in full.

But if you need a card for a high volume of spending, always pay off the balance and enjoy built-in travel perks, a charge card could be right for you.

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