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While people sometimes use the words charge cards and credit cards synonymously, the two are actually very different payment instruments, which each come with their own unique set of advantages and disadvantages.
The main difference between credit cards and charge cards is that while credit cards allow account holders to carry accrued balances over from month to month, charge cards, for the most part have to be paid off in full at the end of the monthly billing cycle. Furthermore, while credit cards come with a preset spending limit, charge cards do not: instead, the card issuer sets flexible spending limits, which are based on the cardholder’s previous payment history, credit rating, and estimated financial resources. These distinctions translate into significant differences when it comes to the effects the cards have on both cardholders’ finances and credit score.
One advantage of using a charge card instead of a credit card is that it protects cardholders from accumulating credit card debt, since the balance has to be paid off in full each month. For cardholders who find that they constantly spend more on their credit cards than they intended to, shifting to a charge card will provide all the conveniences of plastic, and none of the drawbacks. Having to pay down the balance in full at the end of the billing cycle is usually a great deterrent against overspending. Of course, this only works as long as the balance is paid off in full each month; charge cardholders who spend more than they can afford will find themselves facing substantial penalty fees and high interest rates if they can’t pay the balance off at the end of the month.
Another advantage of charge cards is that while they allow consumers to build a credit record by contributing to payment history and depth of credit, they generally won’t impact another important part of the FICO score: the utilization ratio. According to FICO’s consumer operations manager, the majority of scores used by credit reporting agencies now exclude charge cards when calculating the utilization ratio. (One exception is TransUnion’s credit score, which still factors in charge cards, though the company has indicated it intends to change this.)
Credit utilization, or the debt-to-credit ratio, measures how much of the available credit a cardholder has tied up in credit card debt. This number contributes to a significant portion—30 percent—of a cardholder’s FICO score. The utilization ratio includes the balances across all credit cards, even those you may be paying off in full at the end of the billing cycle. In short, charge cards can be a useful tool to avoid having those balances inflate your utilization ratio, particularly if you are having trouble keeping credit card balances below the recommended 30 percent of the total credit limit.
Charge cards are increasingly becoming like credit cards. Like credit cards, many charge cards now offer rewards programs—for an annual fee. American Express, by far the largest charge card issuer, offers its cardholders membership rewards through its Green, Gold, and Platinum charge cards. In addition, some charge card programs now allow select, low-risk cardholders to carry a revolving balance, based on an evaluation of the cardholder’s credit history and personal finances. Terms for carrying a balance on a charge card are unique to each cardholder situation and must be negotiated with the card issuer.
Charge cards, however, are not for everyone. Those who apply for charge cards instead of credit cards will find that the acceptance process is somewhat more stringent: usually those with good to excellent credit will have the most success landing a charge card.
In addition, consumers looking for credit to enable them to pay for large purchases over a longer time frame, will find that credit cards with set interest rates provide the best option. The numerous 0% APR introductory credit card offers on the market are a readily available resource for longer-term financing, initially free from interest. In short, ultimately charge cards and credit cards each offer a variety of benefits, and the best card option will be the one most suited to your financial needs and plans.
