Charge cards are similar to standard credit cards with one major exception.
Many people hearing the term charge card will say, “Charge what?”
It’s hard to blame them: You don’t see charge cards much anymore. Today, the only major provider still offering them is American Express. Other issuers stick to credit cards.
Here’s how charge cards differ from your typical credit card.
What is a charge card?
What’s the biggest difference between a credit card and a charge card? You can carry a balance month to month on a credit card. With a charge card, you have to pay your balance in full each month.
An easy way to tell if you’re looking at a charge card is by checking a card’s terms and conditions. For instance, here’s the pricing information for the Chase Sapphire Preferred credit card:
See the interest rates for “Purchase Annual Percentage Rate,” “Balance Transfer APR” and “Cash Advance APR”? You’ll also find information about an interest grace period and the minimum interest charge. This is a clear indication that you’re looking at a credit card.
Now look at the pricing information for American Express’s Premier Rewards Gold Card:
There’s no information about interest payments anywhere. Here, you’re looking at a charge card.
Charge cards trace their roots back to the late 1800s, when companies issued metallic “charge plates” and “charge coins.” These were used to imprint customer information onto sales slips.
Can I apply for a charge card?
Card providers typically require good to excellent credit of 680 or higher for charge cards. Because you pay your balance in full each month, your issuer wants to know that you’re likely to repay your debt.
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How charge cards work
A charge card is slightly different from a credit card, but don’t be intimidated. You can use one just like you use any other card — simply swipe or insert your card, if it includes a chip.
When your bill arrives, you have one choice: Pay the whole thing. A charge card can be convenient in that sense, because it forces you to clear your slate each month. It also means that you won’t pay interest on your charges.
There are exceptions, however. If you qualify, American Express will let you carry a balance on your charge card through Pay Over Time. Pay Over Time can be applied to purchases of $100 or more and eligible travel charges. If you apply for this option, you’ll be the proud owner of a rare charge–credit hybrid card.
Credit limits vs. preset spending limits
When you’re approved for a credit card, your approval will include a credit limit — that is, an amount over which you can’t spend. A charge card, meanwhile, will likely advertise “no preset spending limit.”
“No preset spending limit” means that your card doesn’t allot a specific credit limit. It doesn’t mean that you can spend as much as you want. Instead, your card provider will set a spending limit based on factors like your income and previous spending levels.
With a credit card, you’ll know what your credit limit is. With a charge card, you might not know this amount. You could unwittingly exceed your spending limit, at which point your card would be declined when you attempt to make another purchase.
To avoid hitting your spending limit, contact your card provider to confirm what your limit is. Alternatively, slowly test the boundaries of your spending limit: Spend a little at first, and notify your card issuer or if you plan on making purchases that may put you over your limit.
As a rule of thumb, assume your limit is two to three times your average balance over the last few months.
Why use charge cards?
Credit cards have a few advantages over charge cards. But you may find a charge card worth picking up for a few key benefits.
- It builds in automatic debt prevention. People can get in trouble with credit cards when interest sneaks up on them. This situation is less likely with a charge card, because you must pay your balance in full each month.
- No preset spending limit. Unlike a static credit limit, your spending limit can vary. This means that you can ask your card provider to approve purchases that go over your spending limit. And of course, you can request an increase in your spending limit.
Forgetting to pay can cost you
If you rack up a big balance on a typical credit card and you’re not prepared to pay it off, you can make the minimum payment. But that’s not an option with a charge card — it’s all or nothing.
That said, watch your balance carefully if you’re using a charge card. If you can’t pay when your bill is due, you’ll be hit with painful late fees.
For American Express, you’ll be charged $27 if you pay late the first time. If you pay late again within the next six billing periods, you’ll be charged a $38 fee. And if you miss two consecutive billing periods, you may have to pay 2.99% of the amount you owe. Your credit score may also take a hit if you pay late, which could lead to longer-term financial trouble.
Keep your balances in check and keep track of your due dates, and it’ll be smooth sailing with your charge card.
Will a charge card affect my credit score?
Your credit score will dip slightly when you apply for a charge card. But this isn’t any different from the dip you’d see when applying for a credit card.
When considering your application, your card provider will initiate a hard pull on your credit report. This means they’re checking your credit history to decide whether to take you on as a cardholder. A hard pull causes your credit score to drop a few points, but you’ll soon recover those points with timely card payments. Your credit score may drop a bit further overall, because getting a new card lowers your average account age. Again, this drop is typical for all credit cards.
Do charge cards affect credit utilization?
If you have credit cards, you’ll know what your credit limits are. Then it’s easy to calculate your credit utilization. It’s a different story with charge cards, because they don’t have credit limits.
Without a credit limit to work with, some card providers may report the highest balance you’ve had on your charge card within a certain amount of time. This could serve as your card’s effective credit limit.
For example, say you typically spend a few hundred dollars a month on your card. If your highest balance is $500, your credit utilization may look high if your card provider reports that as your credit limit. But if your highest balance is $5,000, your credit utilization may seem low.
This doesn’t mean you have to start worrying about your highest balances. FICO, the go-to credit score provider, says they don’t use the “highest balance” model to calculate scores. So, your charge card won’t affect your credit utilization or credit score — at least where it matters.
Your credit utilization makes up about 30% of your credit score. That’s second only to your payment history, which makes up 35% of your credit score.
Charge cards vs. credit cards
- Balances and interest. You can carry a balance on a credit card, paying interest for the privilege. You can’t carry a balance on a charge card, so you won’t pay any interest.
- Credit and spending limits. Your credit card will have a credit limit. Your charge card doesn’t have preset spending limits — but like a credit card, you’re not entitled to unlimited spending.
- Credit utilization ratio. Credit card spending will affect your credit utilization. Charge card spending won’t.
- Costs. Charge cards tend to come with higher annual fees than credit cards. Late and returned fees are about the same for both card types.
- Rewards. American Express charge cards come with travel benefits. But you’ll find many types of credit cards, from travel to cash back to secured and more.
Next steps: Where to get a charge card
Ready to apply for a charge card? Start by comparing those offered by American Express.
- The Gold Card: A good choice for frequent travelers.
- The Premier Rewards Gold Card: A card that offers well-rounded point earnings.
- The Platinum Card: A powerful card that offers excellent earnings on travel spending.
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Frequently asked questions
Can I rebuild my credit score with a charge card?
Yes. Like most typical credit cards, your charge card provider will report your payment history to the three main credit bureaus, and timely payments will increase your credit score.
What if I don’t have the right credit score to get a charge card?
Consider rebuilding your credit with a secured credit card. You’ll find excellent secured cards from many reputable providers.
How can I make sure to pay off my bill each month?
Enroll in your provider’s autopay feature. You can schedule payments so that you don’t have to worry about paying your bill on time — or the penalties that come with late payments.