What is a charge card?

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Published on August 21, 2024 | 5 min read

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Key takeaways

Charge cards require payment of the entire balance every month, unlike credit cards, which allow for carrying a balance.
Charge cards may offer rewards and benefits but may also have late fees for missed payments.
Charge cards can have a different impact on credit scores compared to credit cards, as they do not contribute to credit utilization and may have different reporting policies.

Charge cards can be a valuable tool for managing your finances and building credit, but they are often misunderstood and underutilized. Unlike credit cards, charge cards require you to pay your balance in full every month and do not have a preset spending limit.

This unique feature can offer benefits and help improve your credit score, but charge cards aren’t right for everyone. Whether you’re new to charge cards or considering adding one to your financial portfolio, it’s important to understand the differences between credit cards and charge cards. In this article, we’ll discuss what exactly a charge card is, how it differs from a credit card, and the potential pros and cons of using one.

What is a charge card?

A charge card requires full payment every month. Unlike credit cards, charge cards don’t have a preset spending limit. Instead, purchases are approved based on spending and payment history, financial resources and credit records. Since charge card balances must be paid in full by the due date, there is no interest rate or minimum payment. Late fees and other penalties may ensue if the bill is not paid on time, depending on the card agreement.

Many charge cards will offer welcome bonuses, travel perks and other rewards, but certain features are only available with credit cards. Unlike charge accounts, credit card accounts have a credit limit and permit users to carry a balance at an agreed-to interest rate, which is why you’ll only see introductory 0 percent APR offers when looking through credit cards.

Some charge cards have the option to revolve a portion of the debt. For example, American Express provides eligible cardholders with flexible payment services, which allow the member to pay certain transactions over time. Any carried balances incur finance charges, so charge cards are best for those prepared to pay in full each month.

How do charge cards work?

A charge card and credit card work the same when swiping or inserting them to make purchases. However, you’ll need to get into a routine of paying your charge account’s entire balance in full each month. Failing to pay off a large balance can be an expensive mistake. You’ll face a late fee when paying after your due date, often around three percent, so a past-due payment on a $5,000 credit card bill will likely cost you $150 at minimum.

Often, consumers who use charge cards will carry them alongside a traditional credit card. There are advantages to having both. Selecting the right card for each purchase may lead to quicker rewards earning, and diversifying spending can ensure you don’t run up too large of a balance for either account.

Thanks to having no predetermined spending limit, charge cards can be an excellent option for those looking to make big purchases. However, cardholders will have to maintain a good credit history to earn the luxury, as credit issuers will keep a close watch on any over-the-top spending.

How do charge cards affect your credit score?

Whether you’re using a charge card or a credit card, your payment history is reported to the three credit bureaus: Equifax, Experian and TransUnion. Responsible habits can lead to a boosted credit score with charge cards, but their impact isn’t the same as that of a typical credit card.

Charge cards will count toward certain factors that make up your credit score, including payment history and length or depth of credit history. If you use the card as intended and pay off your balance in full each month, charge cards can be a habit builder for a great credit score.

The impact of a charge card on your credit score gets a little complicated when it comes to credit utilization, which is the ratio of debt to available credit on revolving accounts. This factor makes up 30 percent of your FICO credit score (and 23 percent of your VantageScore rating).

Aside from the fact that charge cards are not revolving accounts with rolling balances, they also lack credit limits. For this reason, VantageScore and newer versions of the FICO scoring model likely exclude charge card balances from utilization. “We believe that the majority of scores that are being used out there currently exclude charge cards from utilization,” says Barry Paperno, the former consumer operations manager for myFICO.com.

Thus, high balances on charge cards won’t impact your credit utilization ratio, a potential savior to your credit score if you need to make a large purchase. For example, if you’re looking to spend $10,000, using a charge card is a great way to avoid the potentially negative implications of making that purchase on a credit card with a $12,000 limit.

What issuers offer charge cards?

Most financial institutions have phased out charge cards and focused on credit cards. American Express is one of the only major credit card providers offering cards with a flexible spending limit, including The Platinum Card® from American Express and the American Express® Gold Card. However, some argue that those are no longer true charge cards because you can now carry a balance on them using the Pay Over Time feature. Another charge card still on the market is the Capital One Spark Cash Plus, which is a business credit card.

Charge cards vs. credit cards

The terms “charge card” and “credit card” are often used interchangeably, but as we know, there are some major differences:

Spending limit: A charge card has no preset spending limit, but that doesn’t mean your spending power is unlimited. Instead, the limit is dynamic and adjusted to reflect the customer’s perceived spending capacity.
Interest: A charge card must be paid in full each month, so no interest is charged.
Late fee: Instead of charging interest, an unpaid charge card balance incurs a late payment fee, typically a percentage of the past-due amount.

If you can pay your balance in full, there isn’t much of a difference between the two types of cards, although your spending power is likely to be higher with a charge card. The top credit cards will provide you with more selection regarding rewards, flexible use and less expensive yearly membership. However, a charge card may be the right choice for those looking to avoid interest, earn high-end rewards or spend a large amount.

Want to see if you pre-qualify without affecting your credit score? Check out our CardMatch feature and get matched with a card that best fits your needs.

The bottom line

A traditional card is likely better for someone new to credit cards, but a charge card can offer unique benefits and, if used responsibly, can positively impact your credit score. However, it is essential to understand the differences between charge cards and credit cards before choosing which one to apply for.

While charge cards may not have preset spending limits and don’t charge interest, they require full payment each month and may come with late fees for missed payments. It’s also worth noting that not all credit card issuers offer charge cards, with American Express being one of the few remaining providers — although many of their cards don’t count as true charge cards.

Ultimately, the key is to carefully consider your spending habits and choose the card that best fits your needs. So, whether you opt for a credit card or a charge card, use it wisely to build a strong credit history and achieve your financial goals.