Charge card vs. credit card: How are they different?

When you’re considering credit options, you may notice that charge cards and credit cards look the same, but you might not know that they work differently. For one thing, credit cards allow you to carry a balance—usually with interest charges—from month to month, while you must pay the balance on a charge card every month. 

And there are plenty more differences between how they work. 

What you’ll learn:

• A charge card is similar to a credit card. But a big difference is that a charge card’s balance has to be paid in full each month.
• Charge cards typically don’t have a preset credit limit like credit cards do. Instead, the card issuer might approve purchases based on financial patterns and habits.
• Charge cards aren’t as common as credit cards, but merchants may still accept them as a valid method of payment.

Credit cards are a type of revolving credit. They allow cardholders to continuously borrow and pay back money as long as the account is in good standing. Credit cards have a set credit limit, which is basically the maximum amount of money a cardholder can use.

You don’t have to pay off the credit card’s balance in full each month, but a minimum monthly payment is usually required. And if the balance isn’t paid in full, interest charges may be added to it.

Charge cards are another type of credit account. But unlike credit cards, charge cards generally don’t have a preset credit limit. Instead, transactions are approved based on things like spending patterns, payment history and other credit-related considerations.

At the end of the month, charge card users typically must pay the full balance on the card. Minimum payments and interest rates aren’t usually charged, but if the balance isn’t paid in full each month, there may be additional fees or penalties.

You can make purchases with either card in almost exactly the same way, and the cards often look the same. But they have some key differences. In addition to the spending limits and payment requirements, here are a few other ways charge cards and credit cards differ:

• Fees: Both charge cards and credit cards have some fees associated with them, like late fees. Some credit cards may have an annual fee, but charge cards typically have higher annual fees than credit cards.
• Interest: Credit cards have an annual percentage rate, with interest charged on a balance carried over from month to month. Because charge cards don’t allow you to carry a balance, they may not have any interest rates associated with them.
• Availability: There are fewer charge card options available today, while there’s a variety of credit cards offered. It can also be more difficult to get approved for a charge card. 

Charge cards might affect your credit scores differently from a typical credit card. With credit cards, your credit utilization ratio can affect your credit scores. Because charge cards don’t typically have credit limits, credit utilization may not be a factor. It’s a good idea to check with the card issuer, though.

Other factors that affect your credit scores are still relevant to charge cards and credit cards. So doing things like paying your statement on time each month is important if you have a charge card or credit card.

The benefits of a charge card can vary based on the specific card and issuer but may include:

• No preset credit limit: Charge cards often come without preset credit limits. Instead, issuers may approve purchases based on financial patterns and spending habits.
• No interest: Generally, charge cards don’t apply interest. That’s because the card issuers typically require cardholders to pay off the full balance at the end of the month, so there often isn’t anything to charge interest on. 
• Rewards: Charge cards may offer rewards. Depending on the card, they could come in the form of rewards points or travel deals.

Credit cards can also have perks and advantages when they’re used responsibly, including:

• Rewards: Like charge cards, some credit cards also offer rewards. They may come with cash back, travel miles or other types of rewards.
• Financial flexibility: Credit cards can potentially offer more wiggle room in your finances. For example, if you want to make a large purchase, a credit card might have a higher credit limit to help you access the funding and spread out the payments.
• Credit-building opportunities: Responsible credit card use can have an overall positive effect on your credit history. By doing things like making consistent, on-time payments toward your credit card balances and maintaining a credit utilization ratio of less than 30%, you can help boost your credit scores.
• Widely accepted and accessible: Credit cards are a commonly used and accepted form of payment. Options may be available for all credit levels, from those with excellent credit to people who are building or rebuilding credit.

Before applying for a charge card or a credit card, there are some things you may want to keep in mind.

With charge cards, it’s a good idea to consider the following:

• Late fees: In most cases, you must pay off charge cards in full every month. Carrying a balance might result in a significant late fee or other penalties. And too many late fees could result in the account being suspended or closed. It could also negatively affect your credit scores.
• Annual fees: Many charge cards come with an annual fee. It can depend on the issuer, but it’s still a good idea to keep this additional cost in mind when considering a charge card. Remember, some credit cards also have annual fees. 
• Limited card issuers: Charge cards aren’t as easy to come by as they once were. If you’re looking for other options, consider one of the different types of credit cards available instead.

If you’re considering a credit card instead of a charge card, it may be helpful to keep the following factors in mind:

• Minimum payments: It can hurt your credit if you don’t make at least the minimum payment on your credit card balance each month. Missed or late payments could also lead to fees, higher rates and other penalties.
• Managing debt: Keeping a high credit card balance and letting interest charges accumulate could hurt your credit scores. It could also harm other financial measurements, such as your debt-to-income ratio.

Here are some frequently asked questions about charge cards and credit cards:

Whether you’re building credit or earning rewards, both charge cards and credit cards may be able to help when they’re used responsibly. Making on-time payments, for instance, can help you improve your credit scores over time.

Before choosing a card, take the time to review the benefits, requirements and terms. And if you decide you’re in the market for a new credit card, you can compare credit cards from Capital One. If you see one you like, you can check whether you’re pre-approved for offers—without hurting your credit scores.