A charge card is one of the many forms of plastic you can carry in your wallet (or the virtual plastic you can keep in your digital wallet app). It looks, feels, smells and tastes a lot like a credit card, but there are some key differences between the two.
Here’s everything you need to know about charge cards, how they work, how they’re different from credit cards and why you’d want one (or not).
What Is a Charge Card?
A charge card is a payment method that resembles a credit card but has no preset spending limit and must be paid in full each month. A charge card doesn’t come with a minimum payment option like a credit card, and will charge late fees if you don’t pay off a monthly balance, rather than letting your balance accrue interest.
Charge cards are quite rare for individuals (you’re more likely to see credit cards), but you might see this credit option for cards offered by gas stations or retail store chains (though many store cards are regular credit cards now, too).
Most remaining charge cards are designed for businesses or high-earning individuals.
The terms “charge card” and “credit card” are often used interchangeably, but they’re not the same type of account. The key differences are in how you repay the creditor for your charges.
Charge Card vs. Credit card
|Swipe or enter number to make a purchase on credit
|Swipe or enter number to make a purchase on credit
|Yes; 1% to 2% of statement balance + int. and fees
|16% to 36% on average
|Not typical; 18% to 26% if applicable
|Payments, balances, credit utilization
A transaction with either usually looks the same: You swipe a card or enter the card number, and the creditor covers the purchase. You accrue a balance as you shop with the card, and you repay it to the creditor to get your balance back to $0.
Credit card accounts come with a credit limit, the maximum balance you can accrue on the card before it’ll no longer let you make purchases. A charge card doesn’t come with a spending limit.
Minimum Payment and Interest
For both a credit card and a charge card, you receive a monthly statement showing how much you’ve spent and how much you owe.
A typical credit card monthly statement includes:
- Statement balance: the total charges accrued up to the last day of the billing cycle.
- Current balance: all charges, including any you’ve made since the last day of the billing cycle.
- Minimum payment: the amount due by the due date (usually within a month), typically a combination of 1% to 2% of your statement balance, plus interest and fees accrued during the billing cycle.
You can stay “current” on your credit card payments by making just the minimum payment each month, even while your card carries a balance from month to month. As long as you carry a balance, it’ll accrue interest based on the rate in your agreement (which could be variable and change slightly over time).
In contrast, a charge card requires you to pay off the outstanding balance in full each month (or billing cycle). You’ll incur late fees if you don’t pay in full by the due date, and you won’t be able to make additional purchases until you pay off the balance. Your balance doesn’t accrue interest.
Charge cards and credit cards can affect your credit score a little differently.
Credit utilization — how much of your available credit you’ve used at any given time — is a major factor in determining your credit score under most models. Credit cards are a major contributor to this. Your credit utilization is most often the difference between your current balance and your total credit limit across all cards.
Because charge cards don’t impose a spending limit, your spending on those cards doesn’t count toward credit utilization. Neither VantageScore nor FICO (the major scoring models) take charge card balances into consideration when calculating utilization.
That doesn’t mean your charge card balance doesn’t impact your score, though. The debt is still usually reported to credit bureaus, and unpaid bills can negatively impact your score while an on-time payment history can have a positive impact.
Both charge cards and credit cards can come with rewards programs that let you earn points for cash, statement credit, flight miles, hotel points or other perks based on your spending. Charge cards attached to a store or gas station brand are likely to offer only store credit for that brand, while credit cards often offer a broader range of rewards.
How Do Charge Cards Work?
Using charge cards is a similar experience to using credit cards at the point of transaction: You swipe the card or enter the card number to make a purchase, the card issuer covers the purchase and you owe the issuer the balance.
Charge cards don’t come with a limit on your available credit, so you can spend as much as you want on the card. You just have to pay the balance in full each month or billing cycle, rather than carrying a balance and accruing interest. You’ll likely incur fees for late payment and be unable to make new charges until an outstanding balance is paid off.
Pros and Cons of a Charge Card
There are pros and cons to using a credit card. We’ve gathered the most prominent of them to help you decide if a charge card is the right move for you.
- No spending limit
- No interest on outstanding balance
- Hard to accumulate debt you can’t manage
- Spending doesn’t impact credit utilization
- Not offered by most card issuers
- Might be limited to specific brands, like a gas station or retail store
- Most often available for businesses or individuals with excellent credit and high income
Alternatives to a Charge Card
The modern alternative to a charge card is a credit card. Most issuers have done away with their charge card offerings and replaced them with credit cards.
Credit cards come with some drawbacks compared with charge cards, and it’s easier to accumulate debt that grows with interest and late fees, especially if you have a high credit limit. However, credit cards tend to come with better rewards programs than charge cards.
If you’re looking for a way to shop without carrying cash and want to keep your spending within an amount you can pay off within the month, a debit card is also a good alternative to a charge card. Debit cards are connected to your checking account, so you can only spend the money you already have on hand.
If you have irregular income or cash flow and occasionally need a small credit to float you until payday, you could open an account with a bank like Chime or Varo, which offer a low-cost cash advance. This option is similar to a typical checking account’s overdraft protectionbut comes with a much lower fee and better bumpers to keep you from seriously overextending and accruing endless fees.
Frequently Asked Questions (FAQs) About Charge Cards
We’ve found the answers to the mostly commonly asked questions about charge cards.
What Is the Purpose of a Charge Card?
A charge card is a payment option that extends credit to let you make a purchase and pay for it later. They’re most often available for businesses or high-earning individuals. They help improve cash flow by letting you make purchases anytime and paying your balance in full each month.
What Credit Score Do I Need for a Charge Card?
Most charge cards require an excellent credit score (around 750 and above) and high income.
Are There Fees Associated With a Charge Card?
Like credit cards, a charge card might come with an annual fee, and you’ll pay late fees for overdue payments. If you have good to excellent credit, you should look for charge cards that have no fees and that pay a welcome bonus. Here are nine of the best credit cards with no annual fees for 2022.
What Interest Rate Do Charge Cards Have?
Charge cards don’t typically charge interest, as credit cards do. Instead, your outstanding balance is due in full each month. Some charge cards include an option to repay in installments over time, and those will include an interest rate. A typical charge card APR is a little higher than that for credit cards, so it could be around 18% to 26%, depending on the issuer.
Contributor Dana Miranda is a Certified Educator in Personal Finance® who has written about work and money for publications including Forbes, The New York Times, CNBC, Insider, NextAdvisor and Inc. Magazines.