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 repay in full each month.
The key difference between credit cards and charge cards lies in your ability to carry forward a balance — that is, roll over the debt 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. Still, charge cards do have some benefits. Let's run through the differences between charge cards and credit cards and see which ones work to your advantage and which don't.
How charge cards work
Charge cards look like credit cards and function in 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Some retailers offer charge cards for use at their own stores, although in many cases these have been replaced by credit cards.
Advantages of charge cards
No preset spending limit
Charge cards generally have higher or 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 you should always read 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, it is harder to rack up huge debts 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 has made some of them comparable to or even better than 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 utilisation. Utilisation 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 utilisation element on your credit score.
How charge cards can trip you up
Steep late fees
If you fail to pay your required monthly balance in full, you will incur a late fee, this is likely to be more than the interest you would pay on a credit card.
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 reference agencies , which can damage your credit history, 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 and run into 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, which can be £100 or more.
Charge cards require good to excellent credit — while some credit cards will approve you for an account if yours is less than stellar.
» MORE: What is a good credit score?
How to choose between credit cards and charge cards
It is always advisable to pay 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.
» MORE: Do I need a credit card?
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Greg Karp is a personal finance expert at NerdWallet. He previously worked at the Chicago Tribune and wrote two money books. Read more