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Charge Cards vs. Credit Cards — What Are the Differences?

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Susan Wright
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Susan Wright

Former Finance Contributor

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Susan earned a BA from Michigan State University and her MBA from St. Louis University and has spent more than 25 years as a financial copywriter. She holds 11 financial industry designations, includi...
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Jessica Merritt

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A long-time points and miles student, Jessica is the former Personal Finance Managing Editor at U.S. News and World Report and is passionate about helping consumers fund their travels for as little ca...
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Juan Ruiz

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With so many ways to pay for things these days — including cash, check, debit, credit, and many online payment processing systems — it can almost be overwhelming trying to determine which one to use.

This decision-making can be intensified even more if there are rewards involved … which leads to the question: which is better to use, charge cards or credit cards?

Credit Cards and Charge Cards Are Not the Same

credit cards in a wallet
While credit and charge cards may look alike, the terms, repayment obligations, and rewards that you’re eligible for can be very different. Image Credit: Africa Studio via Shutterstock

While most small plastic cards may all look similar, there are some pretty significant differences between them. This is also true for credit cards and charge cards.

Though the names “credit card” and “charge card” are often used interchangeably, there are some distinct variations between them. One may be much better than the other depending on what you plan to use the card for and how you plan to pay the balance.

So, what’s really in your pocket?

Credit Cards

The definition of a credit card is a card issued by a financial institution that enables the cardholder to borrow funds to make purchases.

The credit card issuer may also grant a line of credit to the credit card holder, which allows them to borrow money in the form of a cash advance. The cardholder will typically be able to transfer funds into his or her bank account, using funds as a check or cash to pay bills and make purchases.

For an individual or business to be approved for a credit card, the issuer will usually check the applicant’s credit to determine whether or not they are a good candidate for paying back borrowed funds.

If the credit card applicant is approved, the issuer will typically determine preset borrowing limits.

For instance, a cardholder with a low credit score may only have a credit limit of $500 or $1,000, while one with a high credit score may be able to use $10,000, $50,000, or more. In some cases, a cardholder may have an unlimited amount of credit they can access using the card!

A large or unlimited credit line can bode well for business owners and executives who may spend a great deal each month on inventory, overhead, travel, and supplies — all of which can be paid for using a credit card. It can also help to build up a significant points or rewards balance.

Many credit cards allow the balance to “roll over” from month to month as long as the cardholder makes a minimum payment. But interest will accrue on the unpaid balance.

Hot Tip: Because credit card interest can be quite high — often in the neighborhood of 20% or more — credit card balances can grow quickly, especially if you only make minimum payments.

Charge Cards

Charge cards work differently from credit cards, though they may look the same. With a charge card, there is typically no interest charged to the cardholder. This is because users of charge cards are often required to pay off their balance in full each month.

Also, charge cards are often branded cards only accepted where the issuing company or retailer does business. For instance, if you have a Home Depot charge card, you generally won’t be able to use it to make purchases at other retailers.

To be approved for a charge card, a credit application must be submitted. Charge card issuers will usually only accept applicants who have good or excellent credit scores.

If a payment is late, the company will report the missed payment to the credit bureaus, which will negatively impact your credit score.

Similar to credit cards, many charge cards offer points or rewards programs. So the more purchases that are made using the card, the more the rewards can rack up.

Is a Credit Card or Charge Card Better?

Having a credit card can provide a great deal of flexibility when purchasing items and services just about everywhere. For example, if you have a Visa or a Mastercard, these credit cards are accepted almost anywhere around the world.

There are many credit cards, such as the Chase Sapphire Preferred® Card and the Chase Sapphire Reserve®, that offer some great rewards — and the more you spend, the higher your rewards balance can grow! Credit cards can offer various benefits and rewards, such as double or triple points if the card is used for travel or dining expenses.

You’re not required to pay off the balance in full each month, so using a credit card can provide more control over your monthly budget. But be careful, because credit card interest charges can snowball!

On the other hand, charge cards may offer a high credit limit or no preset spending limit, which can come in handy for large purchases — as long as you can pay them off each month.

Many charge cards are branded cards that can only be used at specific retailers or service providers, such as gas stations and retail stores. That can be beneficial if you frequently shop with those stores and earn rewards or discounts by using the card. But you’re limited in use compared to most credit cards — such as Visa, Mastercard, and American Express — which are typically accepted almost anywhere.

Bottom Line: Before choosing any type of card for personal or business use, have a good understanding of all the potential pros and cons that can be associated with each option.

Pros and Cons of Using Charge Cards

There are a number of pros and cons to using charge cards that it’s important to understand. You might find that the cost of using a charge card will outweigh the benefits.

How Do Charge Cards Work?

In many ways, charge cards work similarly to credit cards. Like a credit card, charge cards can be used for making purchases in lieu of using cash or a check.

But while a credit card usually has a set limit on the amount you can spend, a charge card may not. That’s because the entire balance is due every month when you use a charge card.

And because you can’t carry a balance with a charge card, there is no interest rate unless you miss your payment.

Without the option for a revolving balance, charge cards don’t count toward your credit utilization ratio, which is a measure of how high your balances are in comparison to your credit limits.

Hot Tip: Over time, charge cards have become less common, and most major financial institutions only offer credit cards.

Types of Charge Cards Available

While charge cards are not as popular as they once were, there are still several different types of charge cards available today. These include:

  • Retailers (such as Kohl’s)
  • Gas stations (such as Chevron, BP, and Shell)
  • Banks (such as Capital One)

Bottom Line: Although credit cards may be more prevalent than charge cards, having a charge card can provide many of the benefits as credit cards, including valuable points and rewards.

Charge Cards and Your Credit Score

Similar to using credit cards, your charge card usage can have an impact on your credit score.

For example, if you pay off your charge card balance on time every month, then your credit score is likely to increase.

Similarly, if you miss a charge card payment, then your credit score will take a hit. You are also likely to incur a late fee and interest charges.

The Benefits of Using Charge Cards

There are a number of benefits that can come with the use of charge cards. This is particularly the case if you have the means to pay off your balance every month.

Because charge card holders are required to pay off the balance each month, you shouldn’t have large interest charges — which can often spiral out of control with credit cards if you only make the minimum payment each month.

Many charge cards offer extensive benefits and rewards, which can include free or discounted hotel stays, airline flights, rental cars, access to airline lounges, and other similar perks.

As charge cards often have higher spending limits (or no spending limit at all), large purchases can be made on these cards — provided that they are paid off by the card’s due date.

The high spending limits associated with charge cards can make them particularly enticing to business owners and executives who make frequent big-ticket purchases.

Penalties and Fees

As with most other types of borrowing, the use of charge cards is not usually free.

Many charge cards will impose an annual fee just for using the card — some can be several hundred dollars or more per year.

With that in mind, be sure you do a thorough comparison between the annual cost of using a charge card with the rewards that may be gained.

Hot Tip: If your monthly charge card payment is late, you’ll likely incur a late fee, which varies depending on the card. You may also be charged interest on the unpaid balance until it is fully paid off. Be sure to at least set up an automatic minimum payment to avoid these fees. However, we strongly advise paying off your balance in full to avoid any interest charges.

How and Where To Get Charge Cards

Depending on the issuer, you can apply for charge cards online or in person.

To apply for a retailer’s charge card, such as Kohl’s, you can visit the store’s location. Often, the retailer will give you an immediate discount on the purchases you make that day.

Pros and Cons Overview of Charge Cards

There are numerous advantages to using charge cards, which can include no spending limit and no interest fees unless you miss a payment. And provided that you pay off your balance each month, using a charge card can also help you raise your credit score.

Before using a charge card, though, consider whether you’re able to pay off your balance in full every month. If you’re short on cash, a charge card may not be the way to go.

Also, many charge cards will require you to pay an annual fee just for owning the card — and in some cases, the annual fee can be quite steep.

But if the points or rewards that you earn (such as free travel) equal more than the cost of the annual fee, it may be well worth it for you.

Pros and Cons of Using Credit Cards

Pros and Cons
Image Credit: Tumisu via Pixabay

Just like with charge cards, there can be some distinct benefits and drawbacks to using credit cards.

Of course, this will often depend on what you are using the card for, and how much of the balance you are able to pay off each month.

How Do Credit Cards Work?

Credit cards allow users to make purchases on credit, meaning you can buy an item or a service and essentially pay for it later. You aren’t usually required to pay off the entire credit card statement amount right away — just a minimum balance every month.

But be careful, because interest will be charged on the remaining balance. Typically, credit cards will charge anywhere from 18% or more in interest.

So if you don’t pay off the balance on your credit card, you may end up paying quite a bit more than the original price for purchases with the card once you factor in interest charges.

Types of Credit Cards Available

There are many types of credit cards available. Some of the most popular are listed below:

  • Personal — Personal credit cards offer a great way to make both large and small purchases without using cash. These types of cards can be extremely convenient since you can usually pay your bill online and view past purchase information. Using a personal credit card can also provide a method of organizing your spending, as most cards will categorize your expenses on a monthly and yearly basis.
  • BusinessBusiness credit cards can provide an avenue for businesses that are looking for ways to finance large purchases without the need to obtain a bank loan. A business credit card can be a great way for small business owners to keep their personal and business expenses separate. Similar to personal credit cards, many business credit cards offer points or rewards that can be redeemed for travel, supplies, office furniture, and other items depending on the card.
  • Student — Because banks and other credit card issuers want to increase their customer base, they will often try to attract users at a young age. Student credit cards are basically the same as other personal cards, but designed specifically for college students when it comes to credit history. Many credit card issuers will offer students a low or 0% APR, at least for the first several months. This can be enticing, particularly because most students do not have easy access to cash or other credit.
  • Low APR — If you carry a credit card balance from month to month, a low APR card can help you save money. To obtain a low APR credit card, you’re typically required to have good or excellent credit.
  • No Annual Fee — As its name implies, a no-annual-fee credit card will not require you to pay an annual fee to use the card. However, some of these cards will charge a higher interest rate or will not offer much, if anything, in the way of rewards or benefits.
  • Secured — If you have had trouble getting a regular credit card due to poor credit in the past, then a secured credit card may be a good alternative. With this type of card, you are required to deposit a certain amount of cash as collateral, which will typically determine the amount of your card’s credit limit. A secured card can help build your credit since your payment history is reported to the credit bureaus.

Credit Cards and the Effect on Your Credit Score

There’s no doubt that using credit cards can impact your credit score.

But depending on how you handle your finances, this can actually be a double-edged sword. A positive credit card history can raise your credit score substantially, while a negative one can do just the opposite.

Unlike fixed expenses like your rent or mortgage and monthly cell phone bill, the amount of money you spend on a credit card can vary (sometimes substantially) from one month to the next.

While this allows you to make all kinds of purchases, the amount you pay back each month — as well as whether or not you do so in a timely manner — can cause your credit score to go up or down.

If you make your monthly credit card payment on time, it will be a positive indicator to the credit bureaus.

Likewise, the credit scoring systems want to know whether or not you can handle different types of debt.

They’ll look at both installment debt (like a car payment that is paid back in regular intervals over a specific period of time) and revolving debt like credit cards, where the amount of debt is open-ended.

The Benefits of Using a Credit Card

Credit cards can offer an enormous amount of freedom and flexibility when it comes to making purchases.

With so many purchases being made online today, credit cards provide added convenience and protection. By simply providing an online vendor with your credit card number, your payment can be made instantly.

And if a credit or identity thief were to obtain your card number, most credit card issuers won’t hold you liable for fraudulent charges.

This is different from using other cards, like debit cards. If your debit card number is compromised and you don’t report it in time, the criminal could wipe out your entire account balance — including your savings and other accounts that may be linked to the debit card.

Credit cards can also offer a long list of rewards. These can span from travel (including airline tickets, hotel stays, and other related items), to meals at various restaurants, discounts on office supplies, clothing, books, and nearly unlimited choices of other products and services.

Depending on which credit card (or cards) you have, you may even find that purchasing certain items and services will equate to double, triple, or quadruple points. This, in turn, can allow your rewards to build up even more quickly.

Credit Card Penalties and Fees

In return for the instant credit you have access to with a credit card, there can be various penalties and fees incurred if you don’t play by the card issuer’s rules.

This is particularly the case if you make your monthly payment late. Most credit card issuers will charge a flat late payment fee, which can range from $15 to $40 and is typically based on the size of your balance.

Any balance you carry on your credit card will be subject to interest. And if you miss payments, the credit card issuer may increase your interest rate. A higher rate of interest can further increase your balance.

Hot Tip: Late payments may be reflected in your credit history and affect your credit score. This can have a domino effect to impact the interest rate that you are charged on other credit agreements, such as your cell phone and utilities.

How and Where To Obtain Credit Cards

Credit cards are relatively easy to apply for. Many card issuers today have online applications that can be completed and immediately sent to the card issuer.

Because many banks issue credit cards, you could also visit your local bank branch and fill out an application there.

credit card application form
Many credit card applications can be found online, and approvals can often be received instantly. Image Credit: via Shutterstock

Pros and Cons Overview of Credit Cards

While there are many benefits that can come with using credit cards, there are also some cautions to be mindful of. Otherwise, the ease and convenience of using credit cards might come back to haunt you.

For instance, a credit card can allow you to purchase high-dollar items. But if you don’t pay off the balance in a timely fashion, you could end up paying double (or more) than the original cost of the item.

In addition, it’s important to remember that your history of on-time payments and your credit utilization are 2 of the key criteria your credit score is based on. So the way you use your credit card can increase your credit score or it could cause it to drop precipitously.

Charge Cards vs. Credit Cards

Charge CardsCredit Cards
Annual FeeUsuallySometimes
Rewards OfferedUsuallyUsually
Exclusive Benefits OfferedUsuallyUsually
Balance CarryoverNoYes
Interest ChargedNo, unless you miss paymentsYes
Late Fees ChargedYesYes
Other Fees ChargedYesYes
Credit Report/ScoreYesYes

Choosing Credit Cards vs. Charge Cards: When To Use Each

Just like any other type of financial choice, selecting a card to use can depend on a number of factors. And because there is no one-size-fits-all solution, what’s best for you might not be a good fit for someone else.

Overall, credit cards can give you a great deal of flexibility in paying off purchases both large and small. So, if you need a bit more leeway, knowing that you will be charged interest on any unpaid portion of the balance — then a credit card may be the better option for you.

By paying your credit card bill on time each month, you can positively impact your credit score. In addition, you may be able to earn valuable points or rewards that you can use to purchase anything from books to travel.

On the other hand, charge cards don’t typically have a preset spending limit because you are required to pay off the balance in full each month.

With that in mind, using a charge card can be a smart way to keep your spending in check each month, while at the same time helping you build up your credit score.

This type of card may also be a good fit for business owners and business travelers who have high monthly expenses and can accumulate significant rewards in the process.

Comparing the Right Card for You

Once you’ve narrowed down whether a credit card or a charge card is the best option for you, the next step is to choose the actual card itself. When doing so, make sure that you compare all of the important areas, including:

  • Fees
  • Spending limit (if applicable)
  • Interest rate (if applicable)
  • Card issuer
  • Points, rewards, and welcome bonus offered

Before you commit to any charge card or credit card, be sure to compare several options and weigh both the benefits and drawbacks of each.

Final Thoughts

Even though credit cards and charge cards can offer you a way to make purchases without having to spend cash upfront, not all cards are created equal.

Because of that, you need to determine which type of card is right for you — and from there, which option will provide you with the most benefit, based on your specific needs and objectives.

Frequently Asked Questions

Can you have “too many” credit cards or charge cards?

Although there is no hard-and-fast rule in terms of having “too many” credit or charge cards, it’s important to be careful if you plan to use credit cards.

That said, some credit and charge card issuers may impose a maximum limit on the number of their cards that you may have. For instance, in the past, American Express imposed a 5-card limit, though there is now no official number.

Which is easier to get, a charge card or a credit card?

Whether you are aiming for a charge card or a credit card, you will first need to apply. This will allow the card issuer to determine whether you are creditworthy (meaning you’re financially stable enough to repay the amount that you borrow).

Generally, charge cards are more difficult to be approved for, as you’ll be expected to pay off the balance each month. But some credit cards, particularly those with the greatest rewards and benefits, may have difficult qualification requirements, too.

What is the best way to choose between charge cards or credit cards?

The best way to choose between having a charge card or a credit card is to determine whether you want to pay off your balance each month with a charge card or have the flexibility to carry a balance with a credit card — although ideally, you’ll pay off your monthly balances with either type of card.

Do charge cards offer rewards like credit cards do?

There are many charge cards that offer rewards. Some of reward redemptions may include free or discounted airfare, hotel stays, concert and sporting event tickets, and items at various retailers.

Are you responsible for unauthorized transactions that are made on your charge card?

Most card issuers offer $0 liability policies for unauthorized charges.

According to the FCBA (Fair Credit Billing Act), your liability for unauthorized use of your credit or charge card tops out at $50. However, if you report the loss before the card is used, then you may not even be responsible for any charges at all. Likewise, if only your credit or charge card number — but not the actual card itself — is compromised, then you are not liable for any unauthorized use.

Can charge cards help improve your credit?

The issuers of both credit cards and charge cards will report your payment history and account behavior (such as making on-time or late payments) to the credit bureaus. Just like a credit card, having and using a charge card can help you to build your credit.

So, when you pay your charge card balance on time, it can improve your credit score. In addition, by having a charge card, you may also be able to improve your credit mix, which is one of the key criteria that is considered when your credit score is determined.

Susan Wright's image

About Susan Wright

While writing about finance and insurance isn’t something that keeps most people awake at night, it is what Susan Wright has focused on for more than 25 years. As a financial copywriter, Susan has an eye for money-related details such as credit and savings, and she loves to pass along helpful information to consumers. Susan holds 11 financial industry designations (including CLU, ChFC, RHU, REBC, ADPA, CITRMS, CIPA) as well as several licenses.


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