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

credit cards vs charge cards

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With so many ways to pay for things these days — including cash, check, debit, credit, and a long list of 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 various rewards involved…which actually leads to the question: which is better to use, charge cards or credit cards?

Looks Can Be Deceiving — Credit Cards and Charge Cards Are Not the Same

While most small plastic cards may initially all look alike, there are actually some pretty significant differences between them. This is even 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. Because of that, 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 in a wallet
While credit and charge cards may look alike, the terms, repayment obligation, and rewards that you’re eligible for can be very different. Image courtesy of Shutterstock

Credit Cards

In their most basic sense, credit cards are defined as cards issued by a financial institution that enable the cardholder to essentially “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.

In this case, the cardholder will typically be able to transfer funds into his or her bank account, which in turn can be used just like 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 the borrowed funds.

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

For instance, someone with a lower credit score may only have a credit limit of $500 or $1,000, while someone 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 will allow the balance to “roll over” from month to month, as long as the cardholder makes a minimum payment. In this case, however, 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 — the amount that is due can grow quickly, especially if the cardholder continues to make only the minimum payment each month.

Charge Cards

Charge cards work differently, though they may look just like a credit card. 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 usually a “branded” card that is only accepted where the issuing company or retailer does business. For instance, if you have a J.C. Penney’s 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 or missed, the company will report this to the credit bureau(s), which in turn can have a negative impact on the cardholder’s 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 One Type of Card Better Than the Other?

Having a credit card can provide a great deal of flexibility when purchasing items and services just about everywhere. As an 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® Card, just to name a couple, that offer some great rewards – and the more the card is used, the higher the rewards balance can grow!

In addition, you’re not required to pay off the balance in full each month, using a credit card can provide even more control over your monthly budget.

But be careful, because credit card interest charges can increase rapidly!

On the other hand, charge cards can be popular due to the various benefits and rewards that they offer.

If the charge card is used for travel or dining expenses, the cardholder may even receive double or triple points when making a purchase. Because of that, charge cards can be a good option for those who do a lot of business traveling.

One caveat here, though, is that because many charge cards are branded, they can only be used at specific retailers or service providers. This differs from most credit cards – such as VISA, MasterCard, and American Express – which are typically accepted almost anywhere.

Depending on the number of purchases that are made at certain retailers — such as gas stations and retail stores — charge cards can be beneficial, though, especially for individuals who regularly shop at certain establishments.

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

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. Otherwise, you might find that the “cost” of using a charge card will far 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 won’t. That’s because the entire balance is due every month when you use a charge card.

Likewise, because you can’t carry a balance with a charge card, there is no interest rate.

Without a credit limit, charge cards are also not counted 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 no longer offer charge cards. (Many do offer credit cards). One exception to this is American Express, which is currently the largest credit issuer that still also offers charge 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, Target, J.C. Penney, Macy’s, and Nordstrom)
  • Hotels (such as Starwood and Hilton)
  • Gas Stations (such as Chevron, BP, and Shell)
  • Banks (such as Chase and American Express)

Bottom Line: Although credit cards may be more prevalent than charge cards, having a charge card can provide numerous benefits, 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 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).

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 won’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 (such as American Express cards) also offer a nice array of benefits and rewards, such as 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 end of the card’s statement 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 per year, or even more.

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 vary 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 setup an automatic minimum payment to avoid these fee’s. 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 or Macy’s, you can visit the store’s location. Often, the retailer will give you an immediate discount on the purchases you make that day.

Pro/Con Overview for Charge Cards

There are numerous advantages to using charge cards, which can include no spending limit and no interest.

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’ll be required 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

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(s) 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.

Plus, you aren’t usually required to pay off the entire credit card statement amount right away — just a minimum balance every month.

But it is important to 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 the things you purchase with the card.

Types of Credit Cards Available

There are many different 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 companies 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 and/or rewards that can be redeemed for travel, supplies, office furniture, and a long list of 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 “lock in” users at a young age. This is why college students are often targets of many credit card offers. Most students have a short credit history (if any), so it can be easier for a student to get a credit card vs. someone who has bad credit history or low credit score. Student credit cards are basically the same as other cards but designed specifically for college student requirements 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 (Annual Percentage Rate) 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 and/or will not offer points or rewards.
  • Secured Credit Card – 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 become 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. This is because 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/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.

By offering instant payment, not only can you receive items quicker, but you can also purchase high-dollar items like computers, televisions, and furniture — even if you don’t have the cash you need on hand.

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, meaning you’ll receive your goods much faster than if the merchant had to wait for cash or a check to arrive.

And if a credit or identity thief were to obtain your card number, most credit card issuers will limit your losses to just $50 (even if there are larger fraudulent purchases made by the criminal with your card).

This is different from using other cards, like debit cards. If your debit card number is compromised, the criminal could wipe out your entire account balance — including your savings and/or 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 – which is particularly beneficial to business owners – clothing, books, and a nearly unlimited choice 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/or 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-$40 and is typically based on the size of your balance.

But once you make a late payment, the financial impact doesn’t necessarily always stop there; there are a couple of other ways you could be penalized.

One is by having your credit card interest rate raised. If you do not pay off your balance each month, this higher rate of interest can cause your amount due to rise even more.

Hot Tip: You could also have your late payment added to your credit history. This, in turn, can affect your credit score — which may even 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 courtesy of Shutterstock

There are some criteria that you should be aware of before you apply for a credit card.

For example, you must be at least 18 years of age. And if you are under 21, you may be required to provide proof of your income and/or assets to show that you have the means to pay the amount you charge on the card.

Pro/Con Overview for Credit Cards

While there are many benefits that can come with using credit cards, there are also some items you need 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 FeeYesYes
Rewards OfferedYesYes
Exclusive Benefits OfferedYesDepends, but Yes with Many Cards
Balance CarryoverNoYes
Interest ChargedNoYes
Late Fees ChargedYesYes
Other Fees ChargedYesYes
Credit Report/ScoreYesYes

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

Just like with any other type of financial transaction, 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 when it comes to making purchases both large and small.

This goes for how much of the balance you pay off, too. 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, but can accumulate nice 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/or bonus offered

Before you commit to any charge card or credit card, be sure to compare several possibilities and weigh both the benefits and possible 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 up front, 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? (Credit Card Issuers’ Rules)

Although there is no hard and fast rule in terms of having “too many” credit or charge cards, it is still important to be careful if you plan to collect these magical pieces of plastic. In 2017, it was estimated that the average number of credit cards per person in the U.S. was 2.69.

That being 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 (i.e., financially stable enough to repay the amount that you borrow).

There are numerous cards to choose from. For example, some of the most popular credit cards include Visa and MasterCard. Many banks, such as Citibank, also offer credit cards. Depending on your credit score, you may be eligible for an unsecured credit card. Otherwise, a secured card could be the better alternative.

Although there are not as many charge card issuers today as there used to be, there are still several issuers that offer them — and depending on the charge card and the issuer you choose, you may be able to build up some significant rewards.

American Express, for instance, offers several charge cards that allow you to build up rewards points to use on travel, dining, and a whole host of other items and services.

Some of the other big charge card issuers include Diner’s Club, large retailers such as Kohl’s, and gas stations like BP.

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 the type of spending you do most (i.e., personal versus business), and where the majority of that spending takes place.

As an example, if your spending spans across a wide range of different products and services, then a credit card may be the better option. This is particularly the case if you may not be able to pay off your card’s balance every month.

On the other hand, if you do a great deal of travel, then a charge card that is geared towards accumulating points for airfare, hotels, and other related services could be ideal for you. This being the case, though, make sure that you are in a position to pay the card’s balance in full each month.

Do charge cards offer points or rewards like credit cards do?

In addition to earning points on your spending each month, there are many charge cards that offer points and/or rewards. Some of these reward options 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?

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 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 help to 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

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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