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Credit Cards vs Charge Cards

Brendan Harkness

Brendan Harkness | Blog

Jul 09, 2014 | Updated Mar 10, 2017

The main difference between charge cards and credit cards is the requirements for paying off the card.

Credit cards let you carry a balance from one month to the next, while charge cards don’t. Charge cards need to be paid off in full each month.

Check out our picks for the best charge cards.

Charge cards come in almost all of the varieties that credit cards do, focusing on business, rewards, airlines, traveling, hotels, or particular stores. Charge cards and credit cards provide similar point rewards, cash back, and travel discounts, so you can still look forward to these kinds of benefits with either.

There are no significant differences when it comes to the rewards and benefits offered by these cards. The reasons people choose one over the other have to do with the way purchases are paid for over time.

Debt Repayment with Credit Cards and Charge Cards

Credit Cards

Both credit cards and charge cards let you charge purchases to your account as a short term loan from your credit card issuer until you pay them back. If you don’t pay the full amount you owe with a credit card, the remaining balance will carry over to the next month. This is called “carrying” or “revolving” a balance.

It’s usually possible to continue carrying most of your balance to the next month by paying at least the minimum due on a credit card bill, but unless your card has a 0% introductory APR, you’ll be charged interest when you carry a balance.

Your credit card will have an APR (Annual Percentage Rate), which is effectively the interest rate. When you carry a balance from one month to the next, you’ll be charged interest based on this rate. Most credit cards have a grace period, so you can avoid interest completely when paying the card in full.

Your APR is usually determined by your creditworthiness: better credit scores and better credit history usually mean lower APRs. When you’re approved for a credit card you’ll also be given a credit limit, which is the maximum amount you’ll be able to borrow at one time and is also based on your credit score.

Each month, a credit card statement comes with a minimum payment that must be paid. Otherwise, you’ll be charged a late fee, often around $35. You can choose to pay the minimum payment each month and accumulate interest or pay off your entire balance each month, so you end up paying no interest on your purchases.

You can learn more about how paying a credit card and credit card billing cycles work here.

Charge Cards

With a charge card, you must pay the full amount you spent during the last statement period by the due date.

Since you can’t carry a balance from month to month on a charge card, there is no APR. It’s effectively like an interest-free loan for the length of the grace period of the card. In some cases you may be given a credit limit when you are issued a charge card, which limits the amount you can borrow each month.

If you fail to pay off your balance by the due date, you’ll be charged a late fee, which can often be around $35. For most cards there are other penalties. For example, you may incur a fine of 2.99% of your outstanding balance when you don’t pay in full. While the percentage may look lower than an APR, it’s not an annual rate — it’s a percentage being charged right away on the amount due. Most charge cards also allow you to make any more purchases while you have an outstanding due balance.

The Effects of Credit Cards and Charge Cards on Credit Scores

When it comes to keeping your credit score up, the key is financial responsibility for both credit and charge cards. You need to be aware of your terms and how much you’re spending, and be sure to pay what you need to pay by your due dates. The main difference between how charge cards and credit cards affect your credit scores is how credit limits are reported to credit bureaus.

If you make late payments or your payments get returned, these delinquencies will show up on your credit reports whether you’re using a charge card or a credit card.  Credit scoring models count negative credit report items as a big factor, so late payments or returned can bring down your scores significantly with either type of card.

The biggest difference in credit score impact is based on how credit limits are reported. Credit scoring models created by FICO® and VantageScore® look at your debt utilization ratio as another major factor in your credit scores. For example, if you have a credit limit of $10,000 and a balance of $1,000, your debt utilization ratio is 10%.

A low debt utilization ratio shows that the card limit isn’t being maxed out. A lower percentage is generally better for credit scores. This is why you shouldn’t habitually carry a large balance from month to month if you want to maximize your credit scores, even if you don’t mind paying the interest or have a card with a 0% introductory APR period.

Charge cards don’t always have a published credit limit. When the charge card issuer reports the balance of the card to the credit bureau, the credit scoring models may factor in the highest balance to date and use that as the credit limit if the charge card issuer did not provide a limit.

Charge accounts are reported as “open” instead of “revolving” like a credit card. More recent versions FICO scoring models will ignore these accounts when calculating debt utilization ratios. However, many lenders are using previous versions of FICO, which do not ignore this kind of account.

Other than how credit limits are reported, credit and charge cards will help your credit over time in the same ways. If you keep your accounts open for a long time and pay by your due dates, you’ll increase the average age of your credit lines and accumulate a history of timely payments, which are both very important for good credit scores.

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