Though people often use the names interchangeably, credit cards and charge cards are two different things. Both cards help you make purchases without using cash, but there are some important differences you should know before you apply for one or the other.
Require full payment every month
No hard spending limit
Usually high annual fees
No interest since must be paid in full
Not as widely accepted
Typically require very good credit
Allow a minimum payment each month
Strict spending limit
Low or no annual fees
High interest rates if you don't pay in full
Accepted by most sellers
Some cards available to those with lower credit scores
The Big Differences
A charge card works as a type of credit card that requires you to pay your balance in full at the end of each billing cycle rather than make monthly minimum payments on the balance over several months. Charge cards force you to be responsible with your spending because you have to pay your balance off each and every month.
A credit card, on the other hand, allows you to have a revolving balance that you can pay off over a period of time. The convenience of low minimum payments attracts consumers, and some find themselves getting quickly into credit card debt.
Some charge cards don’t have a preset credit limit, giving you a seemingly limitless amount of spending power. However, charge card issuers do have a soft spending limit for your charge card, which is based on what the credit card issuer thinks you can afford to repay each month according to your income, spending, and payment habits.
Credit cards, on the other hand, have a set credit limit that's established when you're approved for the credit card. The credit limit often stays the same, unless you're approved for a credit limit increase or your credit card issuer lowers your credit limit. You may receive penalties if you exceed your credit limit. For example, you’ll pay an over-the-limit fee and sometimes have your interest rate increased for exceeding the credit limit on your revolving credit card.
You typically need to have excellent credit to receive a charge card. You can likely get at least some credit cards, though, even with a lower credit score.
American Express is currently the only card issuer to offer charge cards.
You won’t pay any interest on a charge card balance because the card company won't let you carry a balance beyond the grace period. However, you’ll face a steep penalty if you don't pay your full balance by the due date. The late fee could be a flat fee or a percentage of your balance, depending on the card terms.
Credit cards also have a late fee that’s charged when you don’t make your minimum payment by the due date. By law, the late fee on a credit card can be a maximum of $40, and only if you've missed two payments or more in a six-month period.
While charge cards don't come with an interest rate, credit cards always do, and it's often high. The interest rate is one of the most important credit card features since the rate directly influences how much you pay for carrying a balance on your credit card. You can avoid paying interest on a credit card by paying the balance in full each month before the grace period ends.
Charge cards usually have an annual fee that might be waived in the first year. They can be very expensive—as much as $500 for some high-end cards. Although some credit cards also have a smaller annual fee, it’s usually easy to shop around and find a card with no annual fee.
Other Charge Card Benefits and Restrictions
Charge cards often come with bigger rewards than credit cards do, so that's a perk worth comparing when you're looking at different card options. However, charge cards don't allow you to carry balances or make cash advances. If you're interested in having the ability to make either of these transactions, you'll need to have a credit card. You also won't be able to use your charge card everywhere that you can typically use a credit card.
The Bottom Line
Charge cards are a great option for consumers with strong, established credit and the ability to pay off their spending in full every month. These cards offer some nice perks and a good incentive to avoid spending beyond your means. If you're looking for a card with more flexibility, however, a credit card might be a better choice.
Frequently Asked Questions (FAQs)
When do credit cards charge interest?
Credit card balances start accruing interest after the statement due date. If you haven't paid off your entire statement balance by the due date, then the leftover balance is rolled over to your next statement. Interest is charged during this rollover.
How many credit cards should I have?
Having at least two credit cards is usually a good idea, but the best number of credit cards depends on your financial situation. It's good for your credit score to have more credit accounts, but the average age of your credit also affects your score, so getting multiple cards at once could negatively impact your score.