Personal Finance
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7 mins read
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June 03, 2021
Charge Card vs. Credit Card: What’s the Difference?
Your guide to better understanding how a charge card works, its pros and cons, and the impact it can have on your credit score.
Chances are, you’ve heard the terms “charge card” and “credit card” used interchangeably. After all, both cards are used to make purchases. However, there are important differences between the two, and these are important to understand.
What is the Difference Between a Charge Card and a Credit Card?
The main difference between a credit card and a charge card is that a charge card requires you to pay off your bill in full each month, while you often only need to make a minimum payment each month with a credit card.
Other differences include that charge cards don’t have a preset spending limit, unlike credit cards (when you’re approved, the company will inform you of your maximum credit spending limit). Additionally, charge cards don’t have as wide a range of card issuers as credit cards do.Charge Cards: The Pros
The main pro of a charge card is that you have unlimited spending capabilities — something that a credit card will not provide you, and may not offer you depending on your risk factors such as your income, card history, financial resources, or
.
As such, if you have a large purchase that you want to pay off in a month (that is, not immediately), a charge card may be the better option. Moreover, charge cards are known for their generous rewards, including purchase points or credits for making a purchase, and sometimes even offer double or triple points on dining and travel expenses.
Finally, charge cards must be paid off in full each month. While this may seem like a disadvantage, the benefit is that your balance doesn’t face any
because of it. With credit cards, the annual percentage rate (APR) can spiral people into large amounts of
. With a charge card, this risk isn’t present.
Charge Cards: The Cons
The benefits of a charge card don’t come for free, unfortunately, with cards costing anywhere from $150-$550 a year in annual fees. Admittedly, even credit cards can have these fees, though you can always find a $0 annual fee card, too.
Additionally, there are fewer issuers with charge cards, so you don’t have as many options as you would with a credit card. More detrimental, though, is that charge cards incur late fees if you don’t pay off your entire balance in full, which can potentially be a large amount given the lack of spending caps — and consistently late charge card payments can be more detrimental to your credit score than late credit card payments.
Do Charge Cards Affect Your Credit Score?
A charge card, like a credit card, does have an impact on your credit score. When you open a charge card, the issuer will review your credit profile, resulting in a hard inquiry on your credit score. This will remain on your
for up to two years though the impact to your credit score is minimal. A late payment, however, can stay on your
for up to seven years.
Charge cards can have a more minimal impact on your
, though, given that 30% of your
is dependent on your credit utilization rate. This is how much of your total credit limit you use — the lower that percentage is, the higher your credit score will be.
With a charge card, you have an unlimited amount of spending. So, if your credit utilization rate is high, the negative impacts of that on your credit score won’t be seen. Similarly, if you have a low credit utilization rate, the positive impacts of that on your
also won’t be felt.
Does Cancelling a Charge Card Affect Your Credit Score?
Cancelling a charge card has a much smaller impact on your
than cancelling a credit card.
However, cancelling a charge card will still affect your
negatively. When you close an account, your credit utilization ratio rises as the total amount available to you to spend decreases.
A charge card doesn’t have a spending limit associated with it, so this aspect of closing a charge card won’t impact your credit score. But, it does have an impact on the length of your credit history.
For instance, if your charge card has been open for nine years and you have three credit cards which have been open for 2, 4, and 5 years, the average length of your credit history would be five years. When you cancel your charge card, that average length drops and can negatively affect your credit score. If your charge card is not your longest held card, however,
, and it should be noted that any possible negative impact will be minimal.
Ultimately, a charge card can be a useful financial tool depending on your needs. In avoiding interest charges, many people can save immensely on their
and a charge card can be a lower-risk method to get comfortable with credit. While the high fees can be off-putting,
it can make more sense, financially, than a credit card with a high APR.
