Charge card vs. credit card: What's the difference?

There are significant differences – and some similarities – between traditional credit cards and charge cards, and plastic-wielding financial consumers should get to know them in order to save money.

“Credit cards and charge cards look identical and function in a similar way. Both kinds of cards let you pay for your purchases later,” said Nathan Hamilton, credit card specialist at the Ascent, a personal finance portal owned by The Motley Fool. “You can swipe both credit and charge cards at a store register, and you can also use both for online shopping.”

Credit card basics: Credit cards vs. charge cards

Now let’s examine five key differences between the two plastic payment models, including more rewards and perks, to determine your preferred card.

Rewards and perks

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“The rewards are generally minimal, while premium credit cards that require annual fees offer cardholders a better rewards programs,” said Cris Carillo, a co-founder of Allied Payments an online credit card processing company in Melbourne, Fla. “On the other hand, charge cards have fantastic rewards programs, dwarfing what credit cards offer.”

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“Though annual fees are higher, the various rewards and promotions offered can cover much of the annual costs associated with the card," he added.

Fees

Charge cards and most credit cards impose late fees if you don't pay the bill when it's due. However, there’s a difference.

“You can avoid those fees with a credit card simply by paying the minimum payment, whereas with charge cards, you must pay off the full balance every month,” Hamilton said. “While both charge cards and credit cards may charge annual fees, it’s easier to find no-fee credit cards and no-annual-fee-cards than with charge cards, because there are very few charge cards available to consumers.”

Credit utilization and credit scores

Both credit cards and charge cards report payment history to the credit reporting agencies, so you can build credit by using them responsibly, Hamilton added.

So, do charge cards help your credit score?

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“Because charge cards don't have a spending limit, new credit scoring models generally don't factor them into your credit utilization ratio, which comprises about 30 percent of a credit score calculus,” he said. “That means making big purchases on charge cards won't hurt your credit score, while using a large percentage of available credit on a credit card could cause your score to suffer.”

Spending limits

Credit cards have a preset spending limit that you can’t exceed. On the other hand, charge cards don't have a set limit.

“This doesn't mean you can necessarily charge anything you want,” Hamilton said. “But your limit is determined based on past card use and payment history, and you can usually charge even very costly purchases, as long as you've proven yourself to be a responsible customer.”

Payment timelines

Credit cards and charge cards are similar in the spending half of the card equation – but not so much in the “paying the card debt” equation.

“Charge cards and credit cards allow you to borrow money using the cards loan amount,” said Ethan Taub, chief executive officer at Goalry, an online financial goals platform in Newport Beach, Calif.

Another key difference is how users pay the card debt back.

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“Charge cards need the whole amount borrowed back each month, whereas a credit card allows you to pay back only parts of the payment each month for an agreed amount of time,” Taub explained.

When to use a credit or charge card

According to Carillo, credit cards are ideal for consumers or businesses that have lower, more consistent monthly spending habits.

“Credit card holders might not take advantage of all the premium rewards offered with charge cards,” he said. “This would make the need to pay an annual fee unnecessary when similar rewards could be obtained with no other costs.”

Correspondingly, charge cards are ideal for people or businesses that might have months with spikes in spending, or have large overall monthly balances. “Some charge card holders might also view the enhanced rewards offered as a reason to apply and pay the annual fee for a charge card,” Carillo added.

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As a business, Carillo said he uses credit cards for many of his firm’s monthly recurring billing fees. “We have chosen to use credit cards because we don’t spend much, so our potential rewards are minimal.”

“With our spending habits, paying the additional annual fee would not offer us much benefit with our spending habits,” he added.