Charge cards and credit cards allow you to purchase something without paying for it immediately. You swipe your card and pay later, building your credit in the meantime. But several critical differences stand out between these two card options. It’s essential to understand how they differ.
What Are the Differences Between Charge Cards and Credit Cards?
Charge cards look a lot like credit cards, and they come with many of the same perks. Still, they are not the same. To understand the distinction, you’ll have to know how credit cards and charge cards work.
What Is a Credit Card?
A credit card, issued by a bank or financial institution, allows the cardholder to borrow funds. The cardholder will have to pay back the borrowed money, plus interest and other charges. Some institutions require payment in full by the billing date. Others require payment in installments over time. The card issuer sets a borrowing limit based on your credit score. The law requires issuers to give borrowers a 21-day interest-free grace period.
Credit cards let you get something now and pay for it later. This flexibility can help you buy big-ticket items like vehicles or furniture. Most credit card issuers also offer rewards, including airline miles or points towards hotel rooms. In addition, many national retailers provide branded credit cards consumers can use for in-store purchases.
Credit cards allow you to carry a balance from one month to the next, as long as you pay your monthly minimum. The remaining balance will accumulate interest fees the longer you leave it unpaid.
What Is a Charge Card?
A charge card is similar to a credit card in many ways. It allows you to make purchases using the card issuer’s funds. Like credit cards, charge cards let you build a credit history and earn rewards. The primary difference is that charge cards require you to pay the entire spending balance each month. You will not have the chance to pay off big purchases over several months as you do with a traditional credit card.
The other significant difference has to do with spending limits. A charge card comes with no preset limit. Try not to get too excited — that does not mean you can spend as much as you want. Instead, limits change each month, based on your spending history, payment history, credit score, and other factors. You can check your spending limit whenever you need to.
Pros and Cons of Charge Cards and Credit Cards
These two card options each have unique advantages and disadvantages, which are critical to consider if you’re thinking of applying for one of them. Here are the positives and negatives of charge cards and credit cards.
Charge Card Pros
- No interest accumulated: One notable benefit of a charge card is that you will not accrue interest charges. While traditional credit cards allow you to pay for things over time, you’ll end up owing more than the value of what you’ve purchased. Interest accumulation might make it challenging to dig yourself out of debt over time.
- Better chance of using credit responsibly: Because charge cards require you to repay your spending each month, you’re more likely to use them sensibly. With a credit card, it’s easy to spend more than you can pay back.
- Variable spending power: Your spending limits change each month. If you maintain a consistent track record of repayment, your spending limit could increase.
- Can improve your credit score: Charge cards build credit and let you improve your credit score.
Charge Card Cons
- Becoming scarce: Most fund issuers are replacing charge cards with credit cards, so they’re harder to find.
- Not accepted everywhere: You might have trouble using your charge card everywhere you go, especially overseas.
- Require repayment each month: Those looking for a way to pay back large purchases over several months should opt for credit cards instead.
- Charge annual fees: Remember, charge card issuers require you to pay yearly fees, which can be high.
Credit Card Pros
- More widely accepted: You’re more likely to be able to use your credit card wherever you go.
- Easier to find: Credit cards are a much more common option today than charge cards are.
- Allow you to pay when you can: One of the most notable advantages of a credit card is that it allows you to pay back large purchases at your preferred pace. You can “roll over” the debt from your large purchases.
- Can improve your credit: Credit cards are one of the primary ways to improve your credit score, as long as you use them carefully.
Credit Card Cons
- Can accumulate a lot more debt: Traditional credit cards let you accrue a lot more debt than charge cards do, collecting interest over time. Because of interest charges, you can end up owing a lot more than you spent in the first place.
- Can hurt your credit: Making large purchases or struggling to repay your debt can damage your credit.
How Do Charge Cards and Credit Cards Affect Your Credit?
If you use a charge or credit card responsibly, it will allow you to improve your credit. One difference is that charge cards will not contribute to your credit score’s “utilization” portion. “Utilization” is the available credit you’re using — without a preset spending limit, charge cards cannot contribute to this score. That can come in handy, since you can spend as much as you want without affecting this part of your credit score.
However, remember that charge cards and credit cards can harm your credit if you use them irresponsibly. If you spend more than you can repay, you’ll be in trouble. Whichever option you choose, keep careful track of your spending and make sure you can pay what you owe.
How to Choose Between a Charge Card and Credit Card
So, how do you choose which is right for you? It depends on your goals and circumstances. Here are some of the reasons you might pick a credit card:
- You need a way to pay off large purchases over time.
- You have the self-discipline not to accumulate more debt than you can handle.
- You want perks and rewards.
On the other hand, here are some of the reasons you might pick a charge card:
- You want to improve your credit without accumulating debt.
- You want variable spending limits.
- You want perks and rewards.
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Charge cards and credit cards give you opportunities to improve your credit score and get the things you need without paying upfront, however, they operate in different ways. Learn more about our various card capabilities by signing up for free or joining our credit card waitlist.