Credit cards come in many different flavors. There are secured credit cards that you can use to build credit and rewards credit cards that allow you to earn miles, points or cash back. There are also charge cards. While they’re technically a type of credit card, charge cards and standard credit cards aren’t the same. Let’s look at the differences between charge cards and credit cards.
Charge Cards vs. Credit Cards
Credit cards and charge cards have a lot in common. With both types of cards, you can borrow against a line of credit and potentially earn rewards that can save you money on things like flights and hotel rooms. You don’t have to pay off your credit card or charge card balances until you receive your monthly card statement. And since the purchases made with credit cards and charge cards are unsecured loans, there’s no collateral for lenders to seize if borrowers default on their debt.
If you have a credit card, it’s possible to carry a balance from one month to the next. Not paying your credit card bill in full won’t help your credit score. But it won’t damage your track record with your credit card issuer, as long as you make on-time payments and you pay your minimum credit card balance.
Unlike credit cards, charge cards typically require borrowers to pay off their full balances each month. Because carrying a balance isn’t possible with a charge card, you won’t have to worry about paying interest. But if you can’t pay off your entire balance, you’ll probably have to pay an additional fee.
There’s another key difference between credit cards and charge cards: Charge cards don’t have predetermined spending limits. Your card issuer will likely have rules regarding how much money you can charge to your card every month. But you’re not bound to a specific credit limit and the amount you’re allowed to spend can change over time. That’s not the case with credit cards.
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When to Use a Charge Card
Charge cards aren’t for everyone. They can come with high annual fees and having to pay off an entire card balance every month can be difficult for some people. American Express has been the most common provider of charge cards for a while. But in order to qualify for an American Express charge card, you’ll probably need to have good or excellent credit.
Getting a charge card could be a good idea if you have good credit and you want to earn more rewards. The rewards that go along with having a charge card can rival those offered by companies who provide standard credit cards. Plus, since there’s no credit line, cardholders may be able to pay for more items with a charge card than they’d be able to purchase with a credit card.
Using a charge card could also make sense if you want to take a more disciplined approach to improving your credit score. After all, to avoid paying extra fees you’ll need to get into the habit of making full, on-time payments each month. Having a charge card can teach you how to stick to a budget and keep track of your expenses.
The Pros and Cons of Using a Credit Card vs. a Charge Card
Need to carry a balance every month? The benefit of having a credit card instead of a charge card is that you can pay off your purchases over the course of several months. What’s more, you can easily find a credit card with a low annual fee or no annual fee at all. With charge cards, annual fees are often unavoidable.
But having a credit card means that you run the risk of spending a lot of money on interest. And getting too close to your credit line can raise your credit utilization ratio (the amount of credit you’ve used relative to your available credit limit). Having a credit utilization ratio higher than 30% can lower your credit score.
Related Article: What Is a Debt-to-Credit Ratio?
In the charge card vs. credit card debate, charge cards have a clear advantage since cardholders never have to pay interest. And because charge cards don’t have traditional credit lines, they can’t affect your credit utilization ratio. In other words, you don’t have to worry about maxing out a charge card.
In fact, compared to credit cards, charge cards have a different impact on your credit score. To build credit with a credit card, you have to focus on paying your bills on time and keeping your balances low. But with a charge card, you can boost your credit score simply by making payments in a timely manner and paying your balances in full.
Credit cards and charge cards are similar in the sense that you can use both of them to raise your credit score and earn rewards. But in many ways, these cards are different.
Since using a charge card doesn’t affect your credit utilization ratio, charge cards have less of an impact on credit scores. And because you’re required to pay off your entire balance whenever you receive a bill, charge cards allow you to avoid paying interest and falling into a debt trap.
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