Charge Card vs Credit Card: What’s the Difference?

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Many people often confuse charge cards and credit cards, as they look very similar and almost work in the same manner. However, it’s important to understand the difference between the two if you’re already using them, or you’re thinking about starting to use them.

For this reason, this article will focus on some of the specific characteristics of the charge card vs credit card, and by the end, you will hopefully be more informed about the topic.

What Is a Charge Card?

To put it simply, a charge card requires you to pay in full each month. Although there is no preset limit, the amount that you can draw from a charge card depends on your spending habits and financial resources. Charge cards don’t extend credit, making it compulsory for users to pay their dues at the end of the month. Apart from this, the charge card vs credit card difference isn’t very pronounced, since they work in a similar way as credit cards do, while also offering rewards and perks for users.

Did You Know: Charge cards allow you to pay for certain purchases only, so many stores don’t accept them, as they are not very popular.

What Is a Credit Card?

Credit cards carry a balance from month to month instead of requiring you to pay in full each month, allowing you to pay for your purchases over time while keeping a minimum balance instead of paying the full amount. The credit card definition also implies that regular payments increase your credit card limit, and companies may even go ahead and offer you a new high-limit credit card.

Currently, credit cards are more popular than charge cards, since most financial institutes prefer credit cards because they allow them to earn money through interest. Moreover, there are special credit cards offered for young adults and fair credit.

Did You Know: You can get a credit card even after bankruptcy. Due to their wide availability, the average number of credit cards per person in the US is 3.

Charge Card vs Credit Card: Key Differences

Now that we’ve looked at the individual definition of credit and charge cards, let’s take a closer look at their differences.

Pre-set Limit

Credit cards have a predetermined spending limit, while charge cards do not. The limit on the credit card is based on various factors, including your income, payment history, VantageScore® or FICO® credit score, and debt to income ratio. Because you’re expected to make a payment for the full amount at the end of the month, charge cards do not have a limit—there is no line of credit on a charge card.

Part-Payment

Another difference between a charge card and a credit card is that credit cards allow you to make part payments while charge cards do not offer this option. With credit cards, you can roll debt onto the next month, whereas charge cards require full monthly payment. However, despite having this option available with credit cards, you must still use them responsibly.

Interest Charged

Charge cards do not charge interest as credit cards do. This is again because you pay the whole amount at the end of the month. Credit cards, on the other hand, extend credit and charge interest on the amount. The exact APR varies from one company to another, but you should always look for a good APR in credit cards.

Wide Selection of Card Issuers

A charge card and credit card also differ in terms of the issuer. Even though some credit card applications are denied, credit cards are more popular than charge cards, mainly because they’re widely accepted in stores and they allow you to make part payments. Thus, credit cards have a wider selection of card issuers when compared to the charge card issuer availability.

Benefits

It’s well known that credit cards provide you with several additional benefits, including travel perks, spending rewards, interest promotions, etc. Many charge cards do not offer such rewards and are mostly limited to lending money, although a few offer rewards too.

Late Fees

Although they exist for both cards, charge vs credit card late fees differ in terms of the amount you have to pay if you fail to make the payment by the due date. It is usually higher for charge cards, as the lending companies are not able to earn money as charged interest like credit card companies.

Annual Fee

Just like late fees, both credit cards and charge cards charge an annual fee. Although many credit card companies will advertise that they do not charge one, there is usually a hidden cost in most cases. Again, the actual amount of these fees may vary between a charge card and credit card.

Charge Card Credit Card
Annual fee Yes Yes
Wide selection of card issuers No Yes
Has a preset spending limit No Yes
Responsible for unauthorized transactions Generally no Generally no
APY Yes Yes
Did You Know: According to stats, the average credit card debt of families living in the US is $6,270!

Credit Card vs Charge Card: How Your Credit Score Is Affected

Credit cards have a greater impact on your credit score when compared to charge cards. FICO® scoring models and credit-scoring agencies treat credit and charge cards differently when calculating the credit score. Now, let’s try and understand why that happens.

FICO® scoring models do not consider charge accounts when calculating credit utilization ratio, which is the ratio between your credit card limit and the amount of the loan you’ve taken from it. A lower ratio indicates you’ve taken fewer loans, positively affecting your credit score, whereas a higher utilization rate indicates you already have a lot of loans and affects your credit score negatively even if you make regular payments.

Companies treat a credit card and charge card differently in terms of this ratio. While it constitutes 30% of your credit score, the charge card balance has no effect on this score—even if you take a $900 loan on a $1000 charge card, your credit score won’t be affected as long as you keep making payments on time, whereas this same situation would reflect negatively on your credit score if you use a credit card.

Apart from the credit utilization ratio, both cards have a similar effect on your credit, meaning that regular payments and a good credit record will improve your credit on both charge and credit cards.

Did You Know: With approximately 93 million credit cards in circulation, Chase is the most popular credit card issuing bank!

Wrap Up

Understanding the charge card vs credit card difference is important if you’re using either of them or trying to get one. Credit cards carry a balance from one month to another, while charge cards require you to pay off the balance at the end of the month. Moreover, credit cards have a greater impact on your credit score than charge cards do. Regardless, it’s important that you remain mindful while taking a loan and pay it back on time to avoid any risk factors.

FAQ

Do charge cards have a limit?

Although charge cards don’t have a set limit like credit cards do, there are still some restrictions based on your income, spending habits, credit score, etc.

Is a charge card a debit card?

No, charge cards are different from debit cards. The former uses credit for making payments, while the latter pays directly from your bank account.

What is the best credit score for both a charge card and a debit card?

There is no difference in credit score between charge card vs credit card or debit card. A score above 700 is usually considered good.

ABOUT AUTHOR

I learned a lot about finance after working for a digital marketing company specializing in investing and trading stocks, forex, etc. After that, I got exposed to other verticals such as wealth management and personal finance, which further improved my understanding of the financial world.

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