Charge Cards or Credit Cards – Which Of these is Best & How to Choose.
Charge Cards or Credit Cards: It’s easy to think that “charge card” is just another way to say “credit card,” but the two actually have very different meanings. In this article, we’ll discuss the major differences and characteristics of a charge card vs. credit card, and everything you need to know.
What is Charge Cards or Credit Cards
Charge cards generally require that you pay off the full amount you spend on the card each month.
Credit cards only require that you pay off some minimum amount of the total balance you owe each month. You can carry the rest over onto next month’s bill, although we recommend you always pay off your full statement balance every month to avoid paying expensive credit card interest charges.
Require full payment every month
No hard spending limit
Usually high annual fees
No interest since must be paid in full
Not as widely accepted
Typically require very good credit
Allow a minimum payment each month
Strict spending limit
Low or no annual fees
High-interest rates if you don’t pay in full
Accepted by most sellers
Some cards available to those with lower credit scores
Charge Card or Credit Card Highlights
Has a preset spending limit
Requires you to pay the bill in full each month
No (but you must make at least the minimum payment and watch out for APR)
Has late payment fees
Has an annual fee
Depends on the card, but generally yes
Depends on the card, but generally yes
Has a wide selection of card issuers
Holds you responsible for unauthorized transactions
Charge card or credit card Features
A charge card will almost always feature an annual fee. There are many credit cards, on the other hand, that don’t require annual fees from cardholders. Many credit card companies make most of their money from interest fees. They charge these fees when people don’t pay in full and carry balances to the next billing cycle.
Since charge cards need to be paid in full each month, charge card companies can’t count on making revenue from interest fees on those cards. As a result, they charge annual fees to help cover operating expenses and earn a profit.
Every Credit card has a set credit limit. Credit card companies tell you the maximum balance you can have on a card at one time. Charge cards generally have no preset spending limit.
That doesn’t mean you can spend an unlimited amount. Instead, it means the charge card has an unpublished maximum spending limit for the account based on your spending habits, income, and creditworthiness.
Banks offer credit cards for many levels of credit, from bad to excellent. There are credit cards for students who have no credit history established, and high-end travel rewards cards for cardholders with many years of responsible borrowing. The fees, credit limits, benefits, and rewards can vary widely from one card to the next depending on the credit history of the applicant.
Charge cards generally require excellent credit to qualify. Ideally, you should have a FICO Score above 760 before you apply, although you could be approved with lower scores as well. Since charge cards can allow for large purchases, charge card issuers want to make sure you have the track record and financial resources to pay off what you spend each month.
Using a Charge Card to Build Credit
While a charge card’s credit score impact is limited, practicing healthy financial habits with your charge card can still improve your score. For instance, because it won’t count towards your credit utilization, using a charge card for a large purchase or heavy monthly spending that you’re able to pay off can be useful to avoid a hit on your creditworthiness.
Ultimately, your credit score is determined by how you handle your finances, not the card you carry. Before applying for any charge card or credit card, review your spending habits and do your own research into available options to ensure you find a good fit for your habits.
Charge cards are a great option for consumers with strong, established credit and the ability to pay off their spending in full every month. These cards offer some nice perks and a good incentive to avoid spending beyond your means. If you’re looking for a card with more flexibility, however, a credit card might be a better choice.