The key 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 extend credit. You’re expected to pay the balance in full every month.
- Credit cards, on the other hand, allow you to pay off your purchases over time, although you’ll usually be charged interest if you don’t pay the whole balance right away.
Charge cards are quickly becoming a relic. Nowadays, American Express is the only major issuer of charge cards in the U.S. But they 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.
» MORE: NerdWallet’s best charge cards
How charge cards work
Charge cards look like credit cards and function the same way to make purchases. They have many of the same features, from signup bonuses to rewards to travel 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.
Aside from American Express, some retailers offer charge cards for use at their own stores, although in many cases those have been replaced by credit cards.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 buy 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 — usually
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.
However, American Express nowadays offers some holders of its charge cards a hybrid option, called “Pay Over Time.” It partly turns the charge card into a credit card, requiring only a minimum payment on some purchases and charging an annual percentage rate.
Pay Over Time is available only to some cardholders and applies to approved purchases of $100 or more and all eligible travel purchases. It creates two balances on the same account — one that you must pay off monthly, and another Pay Over Time balance that incurs finance charges when you carry it over month to month.
Rewards and perks
Charge cards may come with generous spending rewards and built-in perks, especially for travel.
However, stiff competition among credit cards has 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 compares favorably with AmEx offerings.
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
With AmEx charge cards, if you fail to pay your required monthly balance in full, you will incur a late fee, which can be as bad as credit card finance charges.
As of January 2017, the AmEx charge card fees work like this: If you pay late, the fee will be $27. That fee rises to $38 if you make another late payment in the following six billing periods. If you miss two billing periods in a row, the late fee is $38 or 2.99% of the balance, whichever is greater.
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. The Platinum Card® from American Express, for example, has a fee of $550.
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.
General-use charge cards in the U.S. come from American Express, the last remaining major issuer of charge cards. Your choices are limited to a few consumer and business cards.
With credit cards, you can choose among literally thousands of offerings from many large issuers, such as Chase, Capital One and Citi, as well as smaller banks and credit unions. Transactions go through several payment networks, including Visa, MasterCard, Discover and American Express.
American Express cards are less widely accepted than Visa and MasterCard credit cards, especially abroad. Because AmEx is the lone issuer of charge cards, they aren’t ideal when traveling internationally. Even in the U.S., you’ll likely need a non-AmEx card as a backup.
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 yours 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.