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A Comparison of Charge Cards vs Credit Cards

A Comparison of Charge Cards vs Credit Cards
Sarah Li Cain
Sarah Li CainUpdated December 10, 2021
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
While charge cards and credit cards may seem the same, they’re not. Consumers use both types of cards to make purchases, but there are crucial differences between charge cards vs. credit cards — namely your spending limit and monthly payment requirements.Before applying for either a charge card or a credit card, it’s a good idea to understand how each works. Read on to learn more.

What Is a Charge Card?

Charge cards can be used to make purchases and usually have features such as the ability to earn rewards and other benefits. Traditional charge cards require their cardholders to pay off their balances immediately, typically within a certain timeframe. This means you won’t be able to carry a balance and pay off purchases over time. These types of cards also don’t have a preset spending or credit limit. That’s why people who typically open these types of cards use them for large purchases. It’s not a card with unlimited spending though — rather, your limit changes. The amount you can spend fluctuates depending on factors such as your credit record, payment history and other financial resources. Cardholders can find out their spending limit by logging into their online account or mobile app, or by calling the card issuer’s phone number (you’ll usually be able to find it on the back of your card).Charge cards typically require good to excellent credit to acquire (more on what is considered good credit here). That’s because the lender is taking a bigger risk by not setting a hard spending limit and trusting you’ll pay your bill in full each month.

Charge Card vs Credit Card

The main difference between charge cards and credit cards is your spending limit and monthly payment requirements. Take a look at the table below to see more differences.
FeaturesCharge CardCredit Card
Wide choice of issuersNoYes
Requires full payment each monthUsually yesNo, though you must make minimum payments
Preset spending limitNoYes
Responsible for unauthorized transactionsTypically noTypically no
Late payment feeYesYes

Major Differences

Charge cards and credit cards allow the cardholder to purchase items without cash in sight. However, there are some major differences between the a charge card vs. a credit card, including:
  • Monthly payments: You’ll need to pay off a charge card balance each month. With credit cards, you can carry a balance but are required to make a minimum payment each month.
  • Interest charges: Charge cards don’t have interest charges since you’re expected to pay off the balance each month. Credit cards charge interest as long as you have a remaining balance.
  • Spending limits: You’ll be given a credit limit when you’re approved for a credit card that is the total amount you can spend. Your transaction may be denied if you reach your credit limit. In some cases, you can go over the limit, but you’ll be charged a fee. Charge cards, on the other hand, usually don’t have limits, but the card issuer may put a cap on how much you can spend. This limit may change based on factors such as your income, credit and payment history.

Effect on Credit Score

Both charge cards and credit cards give you the opportunity to build your credit. However, there are differences in how your spending behavior may affect your credit score. This includes:
  • Payments: You could build stronger credit if you consistently make on-time payment on your charge card or credit card. Late payments are usually reported to the credit bureaus and can negatively affect your score. That’s why one of the biggest tips on improving credit is paying on time.
  • Inquiries: Both a charge card or credit card issuer will review your credit profile when you submit an application. Doing so typically means you’ll be subject to a hard credit inquiry and could affect your score. 
  • Utilization: Credit utilization refers to the percentage of your total available credit you use. It's one of the major factors that credit scoring companies use, and if it’s too high, it suggests to lenders that you could be stretched too thin financially and could result in a lower credit score. Since charge cards don’t have a preset spending limit, it could be hard to determine your credit utilization. Some credit scoring models may not factor your charge card into your credit utilization ratio.

Pros and Cons of Charge Cards

Charge cards offer some perks that credit cards don’t. That being said, there are some downsides as well.Take a look at the pros and cons of charge cards below:
Less likely to take on additional debtLate fees may be high
No preset spending limitTypically charge annual fees
Less impact on credit scoresLess flexibility
Credit cards, when used responsibly can offer plenty of benefits, but depending on your situation, the downsides may not be worth it.
Helps build creditHigh interest charges
Offers perks like fraud protectionPotential to overspend and incur more debt
Pay back balance over timeHas a preset spending limit
Deciding between a charge card vs. a credit card will depend on your financial goals and circumstances.Charge cards are great for preventing you from incurring interest charges. However, you’ll need to make sure you can pay off potentially high balances each month and pay annual fees.Credit cards can offer more options, with some offering rewards and others made for those with poor credit. If you’re someone who is concerned about overspending, a credit card can get you in hot water financially and potentially lead to derogatory marks on your credit report. Still, it can be a great way to pay off a larger purchase over time if used responsibly. Ultimately, your spending behavior will give you the best insights as to whether a charge card or a credit card is right for you. For many, a credit card is a great option, because there’s generally more flexibility. You can choose to pay off the entire balance each month like a charge card, or you can carry a balance if you need some breathing room in your budget. 

What Types of Companies Offer Charge Cards?

Most major retailers offer charge cards as an incentive for consumers to shop with them, though many have transitioned over to credit cards.American Express is a well-known issuer of charge cards, with its signature Gold and Platinum cards. Other startups, like Brex, offer these types of cards for businesses alongside a whole host of perks like expense tracking.As is the case when finding the right credit card, make sure to read the fine print and understand the terms before opening a charge card.

The Takeaway

Both types of cards offer the opportunity to build credit and make cashless payments, but there is a difference between charge card and credit card. Charge cards offer the benefit of no interest charges because you’re required to pay off your balance in full each month — in fact, there may be a fee if you don’t. Credit cards, meanwhile, offer more flexibility since you can make the minimum payment or more. However, you could incur interest charges and accumulate debt, though you can pay off the entire balance to prevent paying any interest. Ultimately there’s no cut-and-dry answer as to which may be right for your financial situation and lifestyle. Whichever you choose, make sure you understand your responsibilities as a cardholder and take the time to find a card that’s right for you. Lantern by SoFi makes it easier to compare credit cards by giving you an overview of each card so you can view different credit card rates at a glance.
Photo credit: iStock/Sneksy

About the Author

Sarah Li Cain

Sarah Li Cain

Sarah Li Cain is a finance writer and podcast producer focusing on topics such as credit, insurance, investing, and real estate. Her work has appeared in major publications such as CNBC Select, Forbes, Redbook, and Business Insider.
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