A Charge Card vs. a Credit Card: What's the Difference?

When weighing a charge card vs. a credit card, people often don't know the key differences between them. Put simply, they transfer debt from the current month to the next one differently. But what does that mean for you, and what should you pay special attention to? Read on and find out.

How Charge Cards Work

Charge cards are similar to credit cards in that you can use them to make purchases without cash, but that's where the similarities end. With a charge card, you don’t have to pay interest as you have to pay off the entire amount you spent at the end of the month. However, late fees range from $29 to $40.

When opting for a charge or a credit card, you should know that charge cards have better benefits for cardholders, as they are primarily aimed at business owners with excellent, or at least good, credit scores.

The Advantages of Using a Charge Card

There are several notable advantages to using a charge card, namely:

No Preset Spending Limits

The lack of a preset spending limit is another feature that sets the charge card apart from other financial instruments. Thanks to no preset spending limit, users with large purchases in mind don’t need to worry about maxing out their card. Keep in mind, however, that one of the key differences between a credit and a charge card is paying the bill in full when it arrives.

Also, having no preset spending limit constraints doesn’t mean unlimited spending is allowed. Charge card companies have soft, undisclosed spending limits on issued cards that change depending on your income, spending, debts, credit record, payment history, and other financial factors. Missing payments, for example, will harm your soft limit.

The good thing is that you can check your current limit with your financial institution and ask for an increase, either via phone or the company’s mobile app.

Rewards and Perks

Benefits tend to be better on business charge cards than credit cards, even if the latter are reserved for the best credit scores. You may get signup bonuses, premium rewards, concierge services, money-saving perks, travel insurance, and complimentary access to airport lounges. However, that’s not to say that a charge card comes for free, as these bonuses are reserved for those who can pay both their monthly balance and the annual fee.

If you want to lessen your costs, check with your card company to see if you can opt out of the perks.

No Debt or Interest

Charge cards don't have APR, which grants them another edge in the charge card vs. credit card debate. There are no interest rates on charge cards since your balance can’t carry over beyond the grace period, which also means you can’t get into debt and owe more than what you spent in a single billing cycle.

However, not paying off your balance on time means dealing with a late fee, which can either be a flat amount or a percentage of your balance, as specified by the card terms.

Smaller Credit Score Impact

Do charge cards build credit? Yes, they do, and how. Another big charge card vs. credit card difference, and an advantage for charge cards, is that modern VantageScore and FICO credit scoring models don't account for the percentage of your total credit used for charge card balances.

Otherwise known as credit utilization, this ratio is a significant factor in determining your credit score. As a rule, lower is better, with the best users having a 30% ratio. However, suppose a credit card company uses an older FICO credit scoring model. In that case, charge cards may be included in the utilization, which is a risk you’ll have to take if you want to take advantage of the benefits of a charge card vs. a credit card.

Because charge cards typically don't have a published credit limit, older FICO models use different means to calculate your utilization. The card balance report your creditor forwards to the credit bureaus contains your highest historical balance on the charge account.

The credit bureau will then use this figure for determining your credit utilization ratio: Say your highest historical charge card balance was $2,500, and your current reported balance is $1,250. The older FICO model would classify your charge card as 50% utilized, even though your unpublished spending limit is probably much higher than $2,500, leaving you with a high credit utilization ratio and thus hurting your credit score.

The Disadvantages of Using a Charge Card

Charge cards also come with a few disadvantages:

Mandatory Full Monthly Payment

Using a charge vs. a credit card to buy immediately and pay later means paying your balance in full by the end of the month. You cannot make minimum payments to avoid late payment fees. Generally, you can’t extend your credit either. Not making on-time payments incurs late payment fees, and the creditor may close your charge card.

On the plus side, this compels cardholders to take care of their balance, as there's no option to delay payment for longer than a month. Lastly, credit card issuers will inform your credit bureau of late payments, affecting your credit score negatively.

Late Fees

Late fees can’t be used as an argument when opting for charge cards or a credit card, as they await you in either case. For example, the fee for not paying your balance in the first month for Amex charge cards is $27. A repeat offense increases it to $40. Additional purchases via the charge card can be disabled until your past-due balance is settled.

Still, American Express offers a "Pay Over Time" program for its charge cards, allowing you to transfer applicable charges to the next month, with an interest fee, up to a specified limit. In essence, this erases the difference between a credit and a charge card: You can pay the balance in full at the end of the month or pay it over time with a steep interest fee.

The only difference is that you can deactivate this program at any time and return to the regular charge card regime. You can use this program for purchases over $100, foreign transaction fees, and annual membership fees, but not cash advances, Cash and Express Cash, certain insurance premiums, and any other fees owed to American Express.

High Annual Fees

Since card companies cannot profit from interest fees when you use a charge account vs. using a credit card, they have annual fees to cover expenses and earn money. The good news is some companies waive this fee for the first year, but after that, the charges can be quite steep, ranging from $95 for standard charge cards to $550 for the American Express Platinum Card®.

Perks and rewards are usually tied to it, too, and the better these benefits are, the higher the annual charge. Still, if the bonuses offered outweigh the yearly cost, it might be a beneficial deal for you.

Good Standing Required

You need a higher credit score to get a charge card than a credit card. A FICO score of 690 or higher signals to the card issuers that you are a reliable customer who can cover big purchases made with charge cards when the time comes.

Not Universally Accepted

Carry an additional card with your charge card when you’re out shopping, as the latter is not accepted everywhere. Some of the more popular retail chain stores don't take charge cards, and as a rule, Visa and Mastercard credit cards are better supported by retail stores than American Express credit and charge cards.

A Credit Card vs. a Charge Account - What Are Credit Cards?

Credit cards are the predominant cashless payment method since they have a set maximum limit and more flexibility when paying off your bills. As a credit card owner, you can borrow a finite amount and pay off a revolving balance over time.

The greatest advantage in this respect is that you can make minimum payments and transfer the rest of your debt to the next month. This capability grants credit cards a considerable edge in the charge card vs. credit card dilemma.

The Advantages of Using a Credit Card

Using a credit card is a better option for a number of reasons:

Minimum Monthly Payments

With a typical credit card, you get a statement balance and a minimum payment due every month. The statement balance represents the total amount you owe, while the minimum payment is usually either a fixed amount (e.g., $25) or 1-2% of your balance. 

The most significant advantage of making minimum payments is avoiding late fees and moving the remaining balance to the next month. Still, delaying payments accrues interest, so you need to be careful not to overdo it.

Affordable Annual Fees

Many credit card issuers charge low or no annual fees. Still, both a charge card and a credit card for exclusive customers have annual fees. The latter usually offer perks similar to charge cards, such as travel benefits, grocery shopping, and restaurant rewards. 

Some credit cards may offer to waive the fee for the first year, and you can close the account or switch to another credit card without adversely affecting your credit score.

Widely Accepted

Credit cards are accepted nearly everywhere, especially compared to charge cards. Visa and Mastercard credit cards have the widest coverage and acceptance, with Discover and American Express quickly catching up.

This is particularly important to keep in mind when choosing between a charge card and a credit card from a business point of view.

Lower Credit Score Requirements

Unlike charge cards, credit cards include a broad range of credit scores, from bad to excellent, with credit cards available for users with a FICO score of 300. The fees and benefits change depending on the credit card and cardholder's credit history, of course.

The Disadvantages of Using a Credit Card

Credit cards also come with several disadvantages to be aware of:

High Interest Rates

Interest rates are the cost of borrowing money, and for credit cards, they’re expressed as the Annual Percentage Rate (APR). Your APR increases if you don't settle your monthly card payments, your monthly payment is returned, or you exceed your credit limit, and it’s very easy to get stuck in the interest spiral.

Because of this, using an American Express charge card vs. a credit card from the same issuer is a better choice since it has no interest charges, nor can you go into debt further than a single monthly payment.

Late Payment Fees

If you pay less than the minimum payment on time or don’t pay at all, late payment fees await. You will be charged from $29 to $40 if you are late with more than one payment within six months. These fees can affect your credit standing by showing up on your credit reports, and higher APR may be applied to current and future balances, including interest on this late fee.

Your Charge-Card vs. Your Credit-Card Credit Score

Late payments, using up your credit limit, having multiple credit cards, and even the hard inquiry a lender makes when you apply for a credit card all affect your credit report. On the other hand, charge cards make practically no impact on your credit score in the newer calculation models, and even if your credit bureau uses an older model, it’s nowhere near the damage a misused credit card can do.

What About Debit Cards?

With a debit card, you’re not taking out a loan, so you don't incur interest charges: It uses money that already exists on your checking account. In the charge card vs. credit vs. debit card battle, debit cards win hands down, provided you have enough funds. There are no annual or late fees, only overdraft costs, where the bank covers a part of your transaction if you don't have enough money in your account.

Overdraft fees are one-time things and can be steep, but you can also limit yourself and opt not to have any overdrafts, instead using only the money you already have. On the downside, debit card users get no perks like credit and charge card users, and these cards play no role in building credit. But they can’t damage it, either.

Which Card Is the Right Choice for You? The Bottom Line

Credit cards offer certain advantages, but charge cards are probably a better choice for big spenders and business owners. With generous credit limits, exclusive rewards, and no debt or interest, charge cards can help with large purchases. Just don't forget to pay your balance in full each billing cycle and check which retail chains accept your card.

On the other hand, if you want low or no annual fees and prefer making minimum payments instead of paying off your full balance, credit cards are the right choice. Knowing how much credit is available to you and settling your credit card charges on time significantly boosts your financial credibility, too.

Debit cards will do the trick for those seeking financial safety, as they incur no debts, or annual or interest fees. In other words, the winner of the charge card vs. credit card vs. debit card debate depends on your personal preferences.