Credit Cards

What Is The Difference Between A Charge Card And A Credit Card

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 8 minute read

Plastic cards, and their digital equivalents, are among the most widely used methods of payment when making purchases both offline and online. In 2020, credit card transactions constituted 27% of the total, with debit card transactions making up another 28%. In other words, by 2020, plastic cards will have been utilized for 55% of all sales.

You typically think of debit or credit cards when you consider using a card to pay for something. There is, however, a further category that’s important to be aware of: charge cards.

What Are Charge Cards?

There are some key distinctions between charge cards and credit cards. Charge cards, like credit cards, are reloadable payment instruments made of plastic or metal. Whether in-store or online, you may use your account number to make payments and purchases.

Like credit cards, charge cards are issued by financial institutions. The issuer of your credit card will be the one to pay the store when you use it to make a transaction. At a later period, you must repay the issuer.

Even if you use both credit cards and charge cards, you may not notice a major difference. But it doesn’t imply that the distinctions aren’t significant.

How Do Credit Cards Work?

Charge cards are essentially the same as regular credit or debit cards. To make a transaction, you can swipe or input your card number into an online payment processor. If you run up a balance, the card company will be the one to notify you.

You will receive a monthly statement from the issuer. Once your payment has been processed, the card issuer will update your account status to reflect the payment and will remove the funds from your available credit.

You must pay your monthly charge in full, unlike with a credit card. No balance transfers are allowed, and late penalties will be assessed for any payment that falls short of the total due. Despite the differences, credit cards still count as loans and can help you improve your credit score.

Using a charge card rather than a credit card is often completely transparent. Some key distinctions, however, should not be overlooked.

What differentiates a charge card from a credit card?

Credit Limit

Charge cards stand out from credit cards in several key respects, the most notable being the absence of a credit limit.

Credit Card Credit Limits

The credit limit is the maximum amount of money you may spend with your new credit card. Until the card’s balance approaches zero, you can use it to make purchases. Once the credit limit is reached, further purchases cannot be made until the debt is reduced.

A typical credit card limit is around $1,000. If there is no balance on the card, you can spend up to $1,000. After using your credit card for a $300 transaction, you’ll still have $700 available.

After that time, you’re free to spend up to $650 on whatever you choose. However, spending $750 would put you over your credit limit and prevent you from making the transaction.

A minor overage of your credit limit may be permitted by some issuers. The issuer may approve the $750 transaction if, for instance, $650 remains of your credit limit. This, however, is not assured, and there are several reasons not to try exceeding your credit limit, including fines and potential harm to your credit.

Credit Limits on Charge Cards

Charge cards, in contrast to credit cards, do not have a restriction on how much you may spend.

Nonetheless, that doesn’t give you carte blanche to go crazy with your card’s spending power. The card issuer will not reveal the exact limit, and it may be different from transaction to transaction and from scenario to situation. In reality, each transaction is evaluated on an individual basis by the card issuer to determine whether or not to authorize it.

However, a charge card issuer’s willingness to lend is often more than a credit card issuer’s limit.

As a result, you may make more impulsive purchases with your charge card without worrying about whether or not your card issuer will catch you going over your limit. In order to be sure your charge card company will cover a large transaction, you may simply notify them in advance.

Amount of Monthly Payment

As opposed to credit cards, charge cards do not allow you to carry a debt from month to month. Every time you receive a statement, you must pay the whole sum.

However, the minimum payment on a credit card may be far less than the debt. If you pay at least the minimum each month, the card issuer will show that you are paying your bill on time. However, interest will be added to your outstanding debt until you pay off your credit card.

When compared to credit cards, charge cards are less adaptable because you can’t opt to carry a load if necessary.

Interest Fees

It’s possible to find interest rates on credit cards that are outrageous. Rates in the 15%-25% range are common, while the exact rate you pay can vary greatly depending on factors including your credit history and the current benchmark interest rate.

Making merely the minimal payment each month will have a negligible effect on your credit card debt. Credit card interest may add up rapidly, making it more expensive to use a credit card than a charge card.

If you use a charge card that does not allow you to carry a balance, you will never have to pay interest. For a little additional fee, some issuers may allow you to spread out the payment of certain costs over time at a set interest rate. In most cases, however, the full charge card amount is required.

Late Fees

Credit card and debit card holders are billed monthly. Late penalties will be applied to your next statement if you don’t pay your credit card bill on time. A similar late charge will be added to your next credit card statement if you don’t pay at least the minimum amount due by the statement due date.

Your payment history may also suffer if you consistently pay late. Since your payment history makes up such a large portion of your credit score, missing even one payment may have a devastating effect on your financial standing.

Annual Charge

There are yearly fees for several credit and debit cards. Such charges are generally associated with high-end rewards credit cards, such as the Chase Sapphire Reserve. 

Access to airport lounges, priority boarding, free nights and room upgrades at hotels, and cash back or bill credits on certain purchases are just some of the enticing benefits that may be had with the use of one of these credit cards.

Card issuers often charge yearly fees to cover the cost of delivering benefits to their customers. Credit cards with fewer perks, such as a simple cash-back rewards card like the Citi Double Cash, are more likely to have no annual fee. With these cards, you won’t have to worry about shelling out annual fees to use them.

In contrast, most charge cards include yearly fees. Most credit card companies market their products as high-end financial services by offering advantages like concierge assistance and travel discounts with the purchase of a card. To cover the price of these extras, they demand an annual fee.

Perks and Rewards

As previously said, even the most basic charge cards typically come with a range of bonuses.

Some credit cards, for instance, provide cardholders with priority security lanes, free or reduced lounge access, and other perks when flying. These features are also offered by many credit cards, but charge cards are more likely to do so consistently.

Auto rental insurance, concert and theater tickets, car warranty extensions, and concierge services are some of the perks that may come with using one of these cards.

Similar benefits and rewards may be found on credit cards. The finest advantages, however, are often reserved for high-end credit cards that cost hundreds of dollars each year to maintain.

Credit is required.

The issuer of your prospective credit card or charge card will likely request a copy of your credit report from one or more of the credit bureaus when you apply for the card. Your credit report documents your past utilization and repayment of credit and debt. Borrowers’ creditworthiness is quantified on a scale from 300 to 850 points, with a higher number indicating more trustworthiness to lenders.

Factors like on-time bill payment and a lack of outstanding debt assist to raise the credit score. A lower credit score is the result of negative financial behaviors including making late payments, carrying a high balance on any one account, or creating too many new credit or loan accounts.

Lenders’ decisions to issue you a credit card or charge account are based in large part on your credit score and the details included in your credit report.

The credit standards for a charge card are often higher than those for a credit card. If you have a charge card, the issuer will likely require you to pay off the whole sum each month, rather than just the minimum required by credit card companies.

While there are premium credit cards available only to those who meet stringent credit standards, many other credit cards are available to those with less-than-perfect credit. Creditworthy customers are the only ones who are granted approval for charge cards.

The Impact on Your Credit Score

The effect of charge cards on one’s credit rating is comparable to that of traditional credit cards. Issuers of charge cards often report account information, including payment history and punctuality, to at least one of the three main credit reporting agencies.

In the right hands, this card may be a powerful tool for building credit. Credit scores might take a hit if payments are missed. Credit usage is one area where charge cards differ from credit cards. How much of your available credit you are currently using.

Credit usage, in addition to total debt, influences the “amounts owing” element of your credit score (which accounts for 30% of the total score). Because of this, it is the second most influential aspect of your credit report, just after your payment history. Credit usage ratios below 30% are considered optimal by experts.

Your credit usage ratio is calculated as follows if you have two credit cards, one with a $1,000 debt and a $7,000 limit, and another with a $500 balance and a $3,000 limit.

  • ($1,000 + $500) / ($7,000 + $3,000) = 15%

A person’s credit usage rate won’t be affected by using a charge card because there are no predetermined credit limitations. When compared to credit cards, charge cards have a significantly less impact on your credit score.

Is a Charge Card the Right Choice for You?

Not everyone should use a credit card. Charge cards are a type of premium product that often has a high yearly cost in addition to enticing bonuses and benefits. A charge card is useful if you’re the kind to make the most of bonuses like this.

If you absolutely must avoid interest, charge cards are also useful. All balances on charge cards must be paid in full each month, and interest will not be accrued on them unless specifically permitted by the card issuer.

Contrarily, a credit card is preferable if you desire the option to carry a balance despite the high interest rates. In a similar vein, if you’re looking for a card with no additional fees, a credit card is probably your best bet. You may hold a debt on some credit cards without paying interest for a promotional period of time, often lasting for a year or more.

Bottom Line

You may make purchases without carrying cash when you use a credit card or a charge card. While charge cards’ monthly payment requirements might be an inconvenience, the premium benefits and privileges they often offer more than make up for it.

As a result, a credit card might be the best option if you want to maximize your travel perks and points.

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