What Is a Charge Card?

A charge card is like a credit card, but instead of allowing you to carry a balance from month to month, you’re required to pay off the full balance every month. It’s a way to make purchases without using cash upfront, but you have to be careful to only spend what you can afford to pay off each month.

Many people incorrectly use the terms “charge card” and “credit card” as if they mean the same thing. While these types of cards have some similarities, they’re not the same. Charge cards are similar to credit cards because you can use them to make everyday purchases. However, rather than only paying the minimum balance each month, cardholders are expected to pay the entire balance in full.

Before you consider applying for a charge card, it’s important to understand how it works and the advantages of having this type of card. Keep reading to learn more.

What Is a Charge Card and How Does It Work?

A charge card is a type of card you can use to make both online and in-store purchases. Unlike credit cards, charge cards require cardholders to pay the entire balance at the end of their billing period.

Many charge cards come with various perks and rewards, such as reward miles or cash back. In most cases, you must have good or even excellent credit to qualify for a charge card.

Charge Cards vs. Credit Cards

While many people think credit cards and charge cards are the same thing, there are some stark differences between them.

Minimum Payment

Credit card companies require cardholders to pay at least the minimum balance each billing cycle. This could be a preset fixed amount or based on a percentage of the overall amount due. This feature allows cardholders to make purchases now and pay for them over several months. Failure to make minimum payments each month could result in late payment fees and other penalties.

Alternatively, charge cards have no minimum balance requirements. Instead, cardholders must pay their entire balance at the end of the billing cycle. Failure to make these payments could result in extra fees, or the credit card company could suspend or close the account.

Some charge cards offer alternative payment options for cardholders. For example, American Express gives cardholders the option to use its Pay Over Time feature, which allows them to pay the balance of certain purchases over a set period of time.

Spending Limits

When you apply for a credit card, you get a set spending limit you can’t exceed without facing possible penalties. Charge cards, on the other hand, have no set spending limit. Instead, approval for purchases is based on your specific income, payment history, and credit report.

APR Rates

APR rates are based on your credit history and credit score. When you have a credit card, your specific APR rate is disclosed upon approval and displayed on your monthly statements. Interest, based on your APR, is charged on any outstanding balance at the end of the cycle.

Interest rates don’t apply to charge cards. Since you’re required to pay the balance in full each month, you’ll never have an outstanding balance to generate interest. However, if you fail to pay your balance, you could face late payment fees and other penalties.

Pros and Cons of Charge Cards

Before you apply for a charge card, it’s important to understand the advantages and disadvantages that come with this type of card.

Pros

There are several benefits of getting a charge card, such as:

Having no spending limit can allow you to make larger purchases without worrying about going over your limit.
Since you must pay your balance off each month, you won’t face high APRs.
Many charge cards come with substantial rewards, benefits, and perks.

Cons

While the benefits are great, you also need to consider the disadvantages of getting a charge card, including:

Charge cards often come with hefty annual fees. Be sure to read the fine print before applying for a charge card.
Typically, you must have good or excellent credit to qualify for a charge card.
You must be able to pay the entire charge card bill each month or face late fees and other penalties.

How Do Charge Cards Impact Your Credit Score?

Another thing you need to consider when getting a charge card is how it will impact your credit score. Lenders offering charge cards typically report all payments to the three major credit bureaus: TransUnion, Experian, and Equifax. Since your payment history accounts for up to 35% of your overall FICO credit score, making on-time payments each month can significantly impact your credit.

When it comes to your credit utilization, which accounts for up to 30% of your overall FICO credit score, having a charge card won’t make a difference. Since there’s no spending limit, most credit scoring models don’t consider charge cards when calculating credit utilization.

On the one hand, a charge card doesn’t give you available credit to use toward boosting your credit utilization ratio. On the other hand, you can make large purchases on your charge card without worrying about it having a negative impact on this ratio.

When to Get a Charge Card

You might have a limited choice of charge cards. However, options are available, such as the Platinum Card® from American Express and the American Express® Gold Card. Be sure to compare your choices and always read the fine print before applying for any type of credit.

You may need to have good or even excellent credit. If your credit score isn’t strong enough right now, you can take steps to improve your credit. Once your credit score reaches the “good” range, you can try applying for a charge card.

Find out your credit score with Credit.com’s Free Credit Score feature. If you want to take look at 28 of your scores and have more tools to manage your credit, the ExtraCredit® subscription is a great option for you.