How to Choose between a Charge Card and a Credit Card?

If you’re like me, you might’ve mistaken “charge card” and “credit card” as being one and the same. After all, it’s quite easy to do. When it comes to appearances, charge cards look just like your standard credit card. Plus, they’re issued by some of the major credit card networks and are used just like any other card.

If you’re scratching your head, trying to decipher exactly how a charge card works, we’ve got you covered. We’ll go over the major differences between a credit card and a charge card, the benefits of a charge card, and how to gauge which is the stronger choice for you:

Charge Cards Versus Credit Cards

Charge cards are pretty similar to credit cards, except for two main things: With charge cards, there’s typically no maximum spending limit, and you’ll need to pay off the balance in full each month. However, with a credit card, the issuer decides your spending cap.

Here’s the deal with credit cards: Typically if you spend more than your limit, your transaction will be declined. You can opt-in to over-limit protection, where your issuer allows you to go over your spending limit for a card. However, expect to pay an over-the-limit fee, which is usually up to $25 for your first occurrence, and $35 for the second occurrence within six months.

If you go over your limit, you might also suffer from an increase in interest rates, which could cost you even more in the long run than those pesky one-time fees.

The other major difference between charge cards and credit cards? You’ll need to pay off your balance in full each month. Whereas you can pay the full balance on a credit card each month, you’re required to with a charge card. (An exception is American Express’ Pay Over Time Direct feature, where you can create two balances: one that needs to be paid off in full each month, and one with revolving credit.)

A credit card allows you to pay less than your actual balance, then carry the remaining balance to the next month, explains credit card expert John Ulzheimer.

Other than that, credit cards and charge cards function in an identical fashion. Using either can impact your credit, you can use a charge card anywhere you can use a credit card, there may be annual fees, late fees, and so forth.

Benefits of Charge Cards

Here are some perks of a charge card:

No APR. Because you’re paying off the balance in full each month, you won’t be paying interest fees on a charge card. (Unless you have a card with a pay-over-time feature. In that case, there’s an APR and you’ll be ponying up money in interest fees.)

Sign-up bonuses. Charge cards might offer generous sign-up bonuses. And if you’re already spending a fair amount on your card each month, you shouldn’t have any problem putting enough transactions on your card to rack up the limit to score a sign-up bonus.

Perks and rewards. If you get a charge card that’s specific to travel or business, your “earn rate” could be far larger than usual on travel-related purchases. Plus, you can enjoy the travel-related perks.

Downsides

There might be heftier annual fees. Depending on the charge card, there might be a larger annual fee. However, if you take advantage of the perks and strategize accordingly, the perks will cover the fee—and then some.

There might be pre-spending limits. While charge cards typically don’t have spending limits, the spending limit on your charge card may depend on and be adjusted based on factors such as your payment history, credit record, and financial resources made known to the credit card company.

Fewer options. While there are many different types of credit cards to choose from, your choices for charge cards are more limited.

How to Decide Whether a Charge Card Is Right for You

You might consider a charge card if the following apply to you:

You travel frequently. If you typically put a lot on your credit card and travel quite a bit, you might want to consider a charge card. Some charge cards feature extra travel perks, like waived baggage fees, airline fee credits, and access to international airport VIP lounges. Some travel-focused cards may offer a higher-than-usual “earn rate” on travel rewards points. Those perks certainly can come in handy! Otherwise, you might be spending money for the annual fee without enjoying enough benefits to offset the cost.

You spend a lot of money. Particularly if you travel frequently or spend a lot of money for your business and have been bumping up your credit limits over time or using a mix of cards, a charge card might make financial sense for you.

You can afford to pay off. Unless the charge card has a pay-over-time feature, you’ll need to make sure you don’t spend more than you can reasonably afford to pay off.

If you don’t put a lot on your card, and could use the option of not being required to pay your card in full each payment period, you might fare better with a credit card.

Of course, no two cards are identical. You’ll want to carefully pore over the fine print and review the terms, conditions, and fees to gauge which card is best for you.