What is the difference between a charge card and a credit card?

December 19th, 2014 Scott Jamison
credit cards

Many people use the terms “charge card” and “credit card” interchangeably, but the truth is the two are quite different. With their own set of costs and limitations, it is important to differentiate between both types of cards. Before you apply for your next card, whether it is a charge card or a credit card, be sure you fully understand the features available to you and how those might impact your financial future. Here’s a look at how the two compare:

Paying your balance

Unlike credit cards, charge cards require you to pay your balance in full each month and generally provide a 40-60 day timeframe to do so. Credit cards on the other hand allow you to carry a revolving balance from month to month, but require a minimum payment within 25-30 days.

Credit limit

Charge cards do not have a preset limit. Rather, purchases get approved based on spending and payment history, financial resources and credit record. Credit cards do have a preset limit, determined by a number of factors including credit score and income.

Credit score

When it comes to your credit history, there is very little difference between charge and credit cards. The difference is how charge cards affect a component of your score called credit utilization. Because there is no limit on charge cards, the balances are not included in the calculation of credit utilization – the amount of debt compared to available credit, counting for about 30 percent of your credit score. There is a greater chance of having a better credit score if the credit utilization is low.

Also, to insure payments are made on time, an excellent credit score is essential to open both a charge card and a credit card.

Credit rewards

Rewards work similarly between charge and credit cards. While most credit cards offer more cash back rewards on things like gas and groceries, charge cards typically appeal to frequent flyers and travelers.

Card fees

There is no interest rate associated with a charge card because balances are paid in full. Instead, cardholders are required to pay an annual fee that varies in price.  Some credit cards also have annual fees because cardholders are not required to pay the balances in full. Interest is then added to the balance that is not yet paid off.

The advantage of using a charge card is that it will build your credit history without running the risk of amassing expensive debt. Nonetheless, credit cards also have benefits. Like with any financial decision, we recommend you review all your options and determine what’s best for you based on your unique financial situation.

Scott Jamison

About the author

Scott Jamison is Retail Managing Officer at MidWestOne Bank. He helps customers manage their personal finances and identify effective money management solutions.

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