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Charge Card vs Credit Card: What is the Difference?

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How are charge cards different from credit cards, and which one is the best card option for me? These are two types of plastic issued by banks with crucial differences in spending limits and payment terms that consumers need to understand before picking one over the other. Our article will explain the major features of each type, and the delve into detail about how credit cards and charge cards compare, and which type makes more sense for particular consumers.

What are Credit Cards?

Credit Cards let users make a purchase "on credit", and put off having to pay for it until their credit card bill is due - it's a means of receiving quick and small loans when making everyday purchases. One of the most important aspects of a credit card is payment flexibility. Credit cardholders do not have to pay back the entire amount spent on the card each month. Instead, they can elect to pay a minimum amount (decided by the card issuer) or any amount between that and the full balance. If the full balance due is not paid, cardholders must pay additional fees called Annual Percentage Rates (APR) on the remaining balance due. With credit cards, consumers are given the choice to repay this balance or to break it up and pay it over time (referred to as ‘carrying a balance’), at the cost of these added fees.

With this ability to delay a payment can come certain additional benefits and extra costs. On the positive side of things, most credit cards offer rewards to users in the form of cash back or points which can be later redeemed for things such as airline tickets, or other goods – these points are awarded to users based on spending money using the credit card. In order to enjoy these benefits, cardholders sometimes have to pay annual fees ranging anywhere from $45 to several hundred dollars for premium credit cards. Some cards, however, have no annual fees (for the best ones, click here).

What are Charge Cards?

Charge cards also allow users to make purchases which can then be paid at a later time. However, charge cardholders must pay back the entire amount they borrow each month upon the due date. If they fail to do so, they are subject to heavy fees and can even potentially lose their charge card.

One of the most important features of charge cards is that they have no preset spending limit. This means that there is no hard limit placed on how much money a user can spend on credit, or “borrow” from their credit card company. Partly for this reason, all charge cards have an annual fee, which can range from $95 to $450.

Furthermore, within the United States, there is a limited selection of charge card options. Only American Express currently offers charge cards, and there are just four options available to consumers: the Green Card, Gold Card, Premier Rewards Gold Card, and The Platinum Card® from American Express.

What are the Differences Between Charge Cards and Credit Cards?

There are four main differences between charge cards and credit cards, and they are between their payment terms, spending limits, annual fees, and options available. Whether a charge card or a credit card is better for you depends on how confident you are in your ability to regularly pay off your entire balance due on time (or the flip side - whether you need external pressure to force yourself to be responsible with credit), how regular your spending habits are from month to month, and whether you're okay with a limited choice you have to pay for each year. In order to gain a deeper and more comprehensive understanding of the differences between charge cards and credit cards look to our analysis below.

When Charge Cards are Better than Credit Cards

Charge cards are best for individuals who have the means to pay off their credit balance every month. They are generally more expensive than most credit cards, but for that charge card holders enjoy some added benefits, such as having no preset spending limit, or access to American Express's Membership Rewards program. This last point allows charge card users to make big purchases, without having to worry about hitting the same limit month to month. Charge card issuers will generally work with the cardholder to allow the consumer to make purchases which the banks think can be paid back.

Another way of looking at this is: because charge cards have to be paid off in full each month or else assess penalty fees, some cardholders find this to be a good way to instill financial discipline and force themselves to only buy things on credit that they can reasonably pay off. Because you do not have to pay off your balance each month, using a credit card has the potential to lead to some poor financial management. Charge cards train users to develop behavior that is conducive to good budget management. Failure to pay off the balance due on a charge card has harsher consequences, however, than are seen with credit cards. Charge card users may see more damage done to a credit score and higher penalties for missing a payment, than if he or she had applied for a credit card instead.

When Credit Cards are Better than Charge Cards

On the other hand, credit cards can give cardholders more flexibility over how much of their balance due they pay off each month, better clarity on how much they can spend, and more varied credit card alternatives and rewards programs. Users can choose to pay the minimum amount requested by the issuer bank, while the rest of the balance due accrues interest expense. While APRs can look high, the average interest rate for credit cards will oftentimes be lower than what you'd have to pay on a charge card, which can save users money. Furthermore, the amount banks are willing to lend users is very clear: the spending limit is predetermined and assigned to each credit card upon approval. This indicates the most that the issuing bank is willing to "lend" users. Any purchase beyond the credit limit will get denied, and there is no flexibility unless you request a spending limit increase, or the bank grants you one.

On the other hand, there are a lot more credit card options for consumers who like choice. The alternatives range from credit cards with no annual fees to premium cards that have generous bonuses, rewards, cash back, and other perks for your business. The value can range from 1% cash back on everyday purchases, to 2% rewards rate when redeemed on travel, or 5% on special categories of merchants. For more information, click to read about our top picks for cash back credit cards, or the best credit cards for rewards.

Charge Card Features, Risks, and Considerations

What is a “No Preset Spending Limit”, and how does that affect my FICO score?

Most charge cards advertise that they have “no preset spending limit”. This term has been the source of some confusion, causing headaches for consumers unaware of its meaning. Some take “no preset spending limit” to mean that unlimited and uncapped purchases can be charged to the card. This, however, is a common misconception. Instead, having no preset spending limit means that your credit limit is not set in stone, and is changed month to month. Your charge card issuer will determine what this limit is based on a number of factors such as payment history, credit score, income, or economic climate. Depending on how you look at it, having no preset spending limit can be an advantage or a disadvantage. If a consumer is not careful about their spending, having a charge card with no preset spending limit can cause negative consequences. These include damage to one’s credit score, or being unexpectedly denied a purchase in a store.

One common myth is that a no preset spending limit will negatively impact one’s FICO score. This, however, is not necessarily true. Credit score organizations report that they consider how close one comes to reaching their limit when determining credit score – getting close to your limit having a negative effect on it. That begs the question: how does having no set limit factor into their calculations? The answer is it doesn’t. When organizations such as FICO look at the spending of charge card holders, they do not carry out the same limit-based calculations they do for regular credit cards.

Having no preset spending limit, and the inability to make partial payments can make for a dangerous combination. While charge card issuers will monitor and stop you from making excessive purchases, they may not be the best judge of what your current spending budget is. This can lead to you being unable to full pay off your charge card debt. As we will explore in the section below, if you find yourself unable to pay your charge card’s end-of-the-month balance, you will incur high penalties and fees. Not only that, but by not paying your bill in full on a charge card, you will be doing serious damage to your credit score.

What are the Penalties for Late Payments on Charge Cards?

If a situation arises where a cardholder cannot pay their credit balance in time, two different scenarios play out depending on whether one has a credit card vs a charge card.

With a credit card, whenever you get your bill, you have the option of paying the full amount due, or a portion of it. The downside of not paying the bill in full is that you will begin to pay interest, or penalty, for each month in which you carry a balance. This option is good, however, for individuals who need more time in order to be able to afford to pay their bill (at the cost of late fees and interest expense). As long as you are making your minimum payments, there is low to moderate impact on your credit score, depending on the balance you carry over as well as your overall limit.

If you are a charge card user, paying your bill is a completely different story. Each month you are expected to pay your balance in full - you do not have the option to pay a portion as with credit cards. If you do only submit a portion of your bill, even if you pay 99% of it, you will incur a late fee. How high is this fee? Most charge cards present the fee as 3%. At first glance, this seems low – especially when compared to the average APR of credit cards (13.02% and 15.68% respectively). However, appearances can be deceiving. APR’s are annual interest rates, while the 3% charge cards present us with are monthly interest rates. If this 3% is annualized we can better compare the interest rates of charge cards to credit cards. A 3% monthly interest rate equates to an APR of around 36% [43%] - much higher than the APR of most credit cards.

To illustrate this point, we took a look at the impact this higher APR would have on an average household. According to recent data from Money.com, indebted American households carry on average a balance of $15,950. By applying average fixed (13.02%), variable (15.68%), and charge card APRs (36%) to this value over a 12-month period, we can better see how much charge card interest rates hurt our wallets when we start accumulating interest. Assuming a beginning balance of $15,950, at the end of twelve months of time, total interest expense would have accumulated to $2,205 for a credit card with a fixed APR, $2,689 for a credit card with variable APR, and $6,791 on a charge card.

This graph illustrates how much interest charges can accumulate on different types of credit cards and charge cards

What Happens if You Can’t Pay Your Charge Card Balance in Full?

If you pay only a portion of the credit card bill your first month, you will have to pay your next month’s bill, your current leftover balance, the late fee, and some interest expense. Not having paid your last month’s balance will likely lower your spending limit in the subsequent months. If you continue to not pay your complete balance in these next couple of months several things will happen. Firstly, the chance that you will lose your card increases. If you do not, you may lose spending privileges or lose all accumulated rewards.

If you are late in your charge card payments long enough, you may be reported to credit agencies. This is equivalent to not having paid your credit card bill. This has catastrophic effects on your FICO score, potentially dropping it below 600. Because consequences of missing payments can spiral out of control quickly, charge cards are not recommended for anyone who is unable or unwilling to not carry a credit card balance month to month.

Consumers who wish to make a large purchase (over $100) and foresee not being able to pay it off at the end of the month can enroll in American Express’s Pay Over Time feature. If the company approves a request to pay for an item over time, the consumer can pay for the one approved item as if it were charged on any other credit card, with a fixed APR of 18.24%. Some experts argue, however, that using this feature will impact your spending abilities in the future, going as far as to say that your spending could be frozen if you use this feature too often.

One final caveat of “Pay Over Time” is that Amex can reject your request. In that case, you will either be forced to pay the full amount due, or face severe penalties.

What are Other Benefits to Having a Charge Card?

In addition to the items we covered above in outlining when charge cards are the better choice, here are some more in-depth advantages to having a charge card over a credit card: exclusive benefits and features, and help with proper budget management.

Charge cards often come with perks not seen in credit cards. AMEX charge cards offer roadside assistance, baggage insurance and car rental loss and damage insurance. Certain American Express charge cards also offer extended warranties on eligible purchases. In some cases, credit cards offer travelers insurance. However, those types of credit cards tend to be “premium travel cards”, which have high annual rates, just like charge cards. Benefits, such as free roadside assistance, are exclusive to charge cards.

ValuePenguin recommends you pay your credit card bill in full each month, regardless of whether you have a credit card or charge card. To that end, charge cards incentivize (or force, depending on how you view the situation) fiscally responsible behavior. Credit cards users may be tempted to carry a balance by making purchases they know they don’t have to pay off immediately. Charge cards take away this option by forcing a cardholder’s hand and wallet into paying their balance every month. If one sticks to this practice, doing so will have a positive overall impact on credit score.

Are Charge Cards Easier to Get?

Charge cards are generally harder to get approved for than most other credit cards. Since they come with no preset spending limit, issuers face greater risks putting a card like this in the hands of someone who does not have a solid track record of paying back debts – they could potentially make many purchases which, when unpaid, the issuer becomes liable for. This is why charge cards, such as the American Express Premier Rewards Gold card, require excellent credit to obtain.

American Express Charge Cards & Comparisons

Back in the 1950’s, American Express was the first major financial institution to offer a plastic card charge card. Since then, they have cornered the charge card market, being one of the only major card issuers to offer these types of cards within the United States. As a result, consumers looking for a charge card find themselves having limited options. The good news is American Express does have a selection of charge cards, ranging from bad to great. These AMEX charge cards earn cardholders Membership Reward points. For an in depth look into the rewards system and to see the value of these points look to ValuePenguin’s comprehensive guide here. Here is a list of AMEX Charge Cards, and links to in-depth profiles and reviews of each card:

Bottom Line: Is a Charge Card Better than a Credit Card?

For the right consumer, a charge card may be an excellent way of building credit, or give more purchasing power. Also, since charge cards force users to pay off their entire balance each month, they teach financially responsible behavior.

Those who cannot pay their monthly credit balance in full, should avoid charge cards like the plague. They will be difficult to maintain and have the potential to destroy one’s credit history.

Comments and Questions

Opinions, analyses, reviews, or recommendations expressed here are the author's alone, and have not been reviewed or endorsed by the issuer. We may be compensated through the issuer's Affiliate Program. For a full list of our advertisers see our disclosure page

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Info about the following cards: Premier Rewards Gold Card from American Express, Delta Reserve® Credit Card from American Express, Platinum Delta SkyMiles® Credit Card from American Express, Hilton Honors Surpass® Credit Card, American Express® Blue Sky, American Express® Green Card, The Amex EveryDay® Preferred Credit Card from American Express, The Amex EveryDay® Credit Card from American Express, The Plenti® Credit Card from Amex, Blue from American Express®, Platinum Card® from American Express Exclusively for Mercedes-Benz, Bluebird, Centurion® Card from American Express, Hilton Honors American Express Aspire Card, Starwood Preferred Guest® American Express Luxury Card, and Amazon Business American Express Card has been collected independently by ValuePenguin. The issuer did not provide the details, nor is it responsible for their accuracy.

Disclaimer: This content is not provided or commissioned by the credit card issuer. Opinions expressed here are author's alone, not those of the credit card issuer, and have not been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through the credit card issuer Affiliate Program.

These responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.

How We Calculate Rewards: ValuePenguin calculates the value of rewards by estimating the dollar value of any points, miles or bonuses earned using the card less any associated annual fees. These estimates here are ValuePenguin's alone, not those of the card issuer, and have not been reviewed, approved or otherwise endorsed by the credit card issuer.

Example of how we calculate the rewards rates: When redeemed for travel through Ultimate Rewards, Chase Sapphire Preferred® Card points are worth $0.0125 each. The card awards 2 points on travel and dining and 1 point on everything else. Therefore, we say the card has a 2.5% rewards rate on dining and travel (2 x $0.0125) and a 1.25% rewards rate on everything else (1 x $0.0125).

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