Both charge cards and credit cards can be convenient ways to pay for purchases, but they have some important differences. Here’s what you need to know about how credit and charge cards differ.
What is a charge card?
A charge card allows you to make purchases. Rather than making monthly payments on what you spend, you must pay the full statement balance by your due date each month.
Like credit cards, charge cards can come with annual fees. However, unlike credit cards, you typically won’t pay interest on purchases. This is because you aren’t carrying a monthly balance. Late fees may apply if you can’t pay the full statement balance by your due date each month. Because you must pay your charge card’s full statement balance, balance transfers are typically not allowed.
Charge cards don’t have preset spending limits, so your balance may not be part of your overall credit utilization ratio. Charge card spending could still impact your creditworthiness through payment history, though. Missed payments may have a negative impact, while consistent payments over time could have a positive effect.
While charge cards don’t have a preset spending limit, that doesn’t mean unlimited spending power. Your financial institution may set a spending limit for the card or approve purchases based on your creditworthiness, income and spending habits.
What is a credit card?
A credit card allows you to borrow up to a fixed amount, known as a credit limit. Your limit depends on factors like your income, creditworthiness and the card.
Unlike a charge card, you don’t have to pay your full statement balance each month. With a credit card, you must make at least the minimum monthly payment or you may be charged late fees. If you carry a balance, you may be charged interest.
How you use your credit card can impact your creditworthiness. For example, your balance is part of your credit utilization ratio – the percentage of your total available credit in use. Your payment history also contributes to your creditworthiness.