Charge cards allow you to make purchases similarly to credit cards, but they have some distinct differences when it comes to monthly payments, credit limits, and building your credit score. This article will explain how charge cards work, their effect on your credit, where to find them, and how they compare to traditional credit cards.
How do charge cards work?
With a charge card, you don’t have a preset spending limit based on your creditworthiness. The card issuer approves purchases based on your spending patterns and payment history. Charge cards must be paid in full each billing cycle. There is no option to carry a balance and just make a minimum payment like with credit cards.
If you fail to pay the balance in full, you’ll face late fees, penalties, or even account suspension. Since you can’t carry a balance, charge cards don’t charge interest on purchases like credit cards do. The lack of spending limit provides flexibility, but the full payment requirement demands discipline.
How do charge cards affect your credit score?
Charge cards can help build your credit if used responsibly. Making on-time, full payments demonstrates positive financial behavior. However, late payments will damage your score like any other card.
An advantage is charge cards don’t impact your credit utilization ratio, since there’s no credit limit to max out. This means using a charge card won’t lower your credit scores like high balances on credit cards can. Overall, charge cards have a lesser effect on your credit compared to credit cards.
What issuers offer charge cards?
Charge cards used to be common but issuers like Visa and Mastercard have phased them out. American Express is the most well-known provider of personal charge cards. Options exist for average credit as well as rewards cards for those with excellent credit. Businesses can also obtain company charge cards for employees.
Charge cards vs. credit cards
| Charge Card | Credit Card |
| No preset spending limit | Comes with a credit limit |
| Must pay the balance in full | Can carry a balance month-to-month |
| No interest charged | Can build a strong credit history |
| Limited impact on credit | Can build strong credit history |
In summary, charge cards offer flexibility but require a full monthly payment, while credit cards have set limits but allow you to carry a balance. Evaluating your financial habits can determine which card type better suits your needs. With responsible use, both can be valuable tools.
The bottom line is charge cards and credit cards have key differences in how they handle payments, credit limits, interest charges, and credit impacts. Recognizing these contrasts helps you select the right card for your budget and financial goals.