Credit cards are a good tool to boost your credit score and collect rewards for everyday purchases. You’ll also have better protection against fraud than with debit cards or cash.
But before you apply for a new credit card, you should know that some are actually considered charge cards.
Though there’s no major difference between a credit card and a charge card in terms of how you use them, there is a difference when it comes time to pay your bill.
“A charge card is a type of credit card that requires the balance to be paid in full each month,” said Brandon Juodikis, a certified financial planner and founder of BRJ Wealth Management. “A credit card, on the other hand, allows you to carry a balance from month to month and pay interest on the outstanding balance.”
Depending on your current financial situation, one could be better for you than the other.
Let’s take a closer look.
What is a charge card?
A charge card is a type of credit card with no preset spending limit. Unlike traditional credit cards, you typically can’t carry a balance and must pay your balance in full every month, said Matthew Goldman, personal finance expert, founder of Totavi and author of Cards FTW. Charge cards often have higher annual fees than many credit cards, but they provide greater spending power to make larger purchases.
The majority of cards out there are credit, though there advantages to charge products, according to Goldman. “Charge products help you manage your spending in that you can’t carry a balance and rack up interest changes,” he said.
Some charge cards include additional benefits and rewards, like airport lounge access and statement credits to save on travel expenses. Though charge cards don’t incur interest, they can trip you up with steep late fees if you don’t pay your balance in full. Here are some pros and cons of charge cards, according to experts I spoke with.
Pros
Majority have no interest
Can improve your credit score and build good financial habits
High spending limit
Cons
Can be difficult to get approval
May have high annual fees
Difficult to manage if you don’t have disposable income
Steep late fees
What is a credit card?
A credit card is a borrowing tool that lets you make purchases within your credit limit. You can have an outstanding balance that carries over from month to month, but you’ll pay interest on it. That’s why it’s best to pay your statement balance in full and on time each month.
“If you do need to do some short-term borrowing, a credit card is better as it is designed to carry a balance,” Goldman said.
But keep in mind a balance comes with drawbacks, including a higher credit utilization ratio (the percentage of revolving credit you’re using) and a bigger debt-to-income ratio. Plus, you’ll pay interest on the amount that’s carried over, which can offset any rewards you earned. Here are some pros and cons of credit cards.
Pros
Widely accepted by merchants and retailers
Easier chances of approval
Lower annual fees
More flexibility if you carry a balance on your card
Cons
High interest rates
Easier to overspend and lead to debt
Damaging to your credit score if you don’t make payments on time
Key differences between charge cards and credit cards
While charge cards and credit cards both let you make purchases and earn rewards, there are some differences between the two. Here’s what sets them apart.
Spending limit
Charge cards don’t have a credit limit whereas credit cards do.
When you open a credit card account, the issuer will give you a set maximum you can spend on that card, which is determined by your credit score and other factors, such as your annual income. The amount won’t necessarily remain the same for the life of the account, as the issuer can unilaterally raise or reduce it.
“If you’re regularly making larger purchases and then immediately paying them off each month, a charge card will give you more spending flexibility,” said Madison Blancaflor, senior editor at The Points Guy, a sister site to CNET, which is owned by Red Ventures.
Interest rate
Interest isn’t accrued on charge cards since you are required to pay your bill in full each month. Very few charge cards let you actually roll over your balance from month to month, and if they do, they’ll charge interest on that remaining balance, just like a credit card.
“If you’re paying off your bills in full each month, which is highly recommended, there really isn’t much of a difference between the two types of cards,” Blancaflor said. But if an emergency comes up, you may want to use a credit card since you may need more time to pay off the balance, she added.
Late fees
Charge cards and credit cards both have fees. Most charge cards have an annual fee, though you can often recoup the fee through rewards and cardholder benefits. Plenty of credit cards don’t charge annual fees, though some rewards credit cards charge yearly fees starting at $95 -- but you usually get more rewards and perks in exchange.
There are also late payment fees. With a credit card, you can avoid a late fee by making the minimum payment. With a charge card, you may get a late payment fee if you don’t pay your balance in full.
Rewards and perks
When it comes to rewards, charge cards have a reputation for being superior to most credit cards. Though charge cards often offer the same benefits and perks as credit cards, they usually have a higher redemption value. For instance, some premium credit cards offer a statement credit for Global Entry and elite hotel status to unlock more rewards, or give you a limited-time free subscription for delivery services.
Some credit cards offer a generous welcome bonus when opening an account. Depending on the credit card and issuer, you may be able to unlock perks that can be used daily or when traveling. Given the vast number of credit cards available, you should be able to find one that fits your lifestyle and spending habits.
Credit score requirements
Charge cards typically require good to excellent credit, while some credit card issuers might approve you for an account if your credit is less than stellar. Many credit cards are available to improve your credit or build credit -- like secured credit cards and student credit cards.
The bottom line
The key difference between charge cards and credit cards comes down to how you pay for your purchases. Before you apply for either one, take stock of your budget and spending to find a card that matches your needs.
Editors’ note: An earlier version of this article was assisted by an AI engine. This version has been substantially updated by a staff writer.
This article includes some material that was previously published on NextAdvisor, a CNET Money sister site that was also owned by Red Ventures and which has merged with CNET Money. It has been edited and updated by CNET Money editors.
The editorial content on this page is based solely on objective, independent assessments by our writers and is not influenced by advertising or partnerships. It has not been provided or commissioned by any third party. However, we may receive compensation when you click on links to products or services offered by our partners.
