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With card-based payments being the norm, understanding the nuances between different types of cards can help you get the best fit for your needs. Charge cards are an alternative to more common unsecured credit cards, offering unique benefits and limitations. But what exactly are charge cards, and how do they differ from credit cards?

Keep reading to learn more about charge cards work, their benefits, and potential drawbacks.

What is a charge card?

A charge card is a type of payment card that requires you pay off the entire balance each month. Unlike credit cards, which allow you to carry a balance from month to month with interest, charge cards generally have no preset spending limit. This flexibility can be advantageous for users who make large purchases and can confidently pay off the balance in full by the due date.

The lack of a defined limit can also impact your credit utilization ratio, a key factor in credit score calculations. Your credit utilization ratio measures what percentage of your available credit you’re using across all credit accounts. Lower credit utilization helps your credit score while carrying high balances lowers your score.¹

Managing your spending responsibly can help you avoid financial strain when payments are due. If you use a charge card to spend above your budget, you could end up in a difficult situation.

Q: When do charge cards charge interest?

A: Never. Charge cards are paid off in full monthly and don’t require interest payments.

How do charge cards work?

Charge cards work on a simple premise: you buy now and pay in full later, within the month. In some ways, they work like a credit card because the card issuer loans you funds for your purchases. Every purchase you make within the billing cycle adds to your balance, and by the end of the period, you have to repay the full amount.

This structure requires financial discipline, as failing to pay off the balance can result in fees or even account cancellation. As long as you pay off the card as agreed every month, you can use it without paying any interest or fees.

Some premium charge cards require annual fees but also offer travel or cash back rewards and other benefits. Always weigh the total cost and benefits when choosing a new charge card or credit card.

Charge cards vs. credit cards

So, what is the difference between a charge card and a credit card? The primary differences between charge cards and credit cards are the payment timing and spending limits. While credit cards offer revolving credit, allowing balances to rise and fall up to the account’s limit and roll over month to month with interest, charge cards require full payment of the balance by the statement due date.

Charge cards usually have no preset spending limit, but the issuer may impose a limit if your balance is too high. Because these types of cards typically allow very high balances, charge cards are not for everyone. They cater to individuals and families with stable financial footing.

Both types of cards work differently than debit cards, which allow you to spend directly from your checking or spending account.

Charge cards and your credit score

Charge cards impact your credit score similarly to credit cards in most ways. Here are the most significant ways charge cards can help or harm your credit.²

  • Credit utilization ratio: as we briefly discussed above, your credit utilization ratio is the percentage of your available credit limit you are using across all credit accounts. Because charge cards don’t have a credit limit, they may be excluded from your utilization ratio in some scoring models. But other models include your charge card balances, so high balances can lower your credit score.
  • Payment history: Payment history is one of the biggest influences on your credit score. Paying at least the minimum payment for every credit-related bill on time helps you slowly build credit, while late and missed payments can severely damage your credit score for years.
  • Average age of credit: Having a number of older credit accounts open and with a history of on-time payments can help your credit score while having many newer accounts can show lenders you’re a higher risk. Keeping accounts open as long as possible is best for your credit when the accounts align well with your financial goals. Charge cards may not always influence your utilization ratio, but they generally count toward your average age of credit, so it’s usually best to keep cards open if there’s no annual fee and you can manage them well.

Pros and cons of charge cards

Understanding the advantages and disadvantages of charge cards can help you figure out if they align with your financial goals.

Pros

  • No preset spending limit: Offers flexibility for large purchases.
  • Interest-free: If you pay your balance in full monthly, you avoid interest charges.
  • Debt prevention: Requires full payment each month, so you can’t easily fall into credit card debt.

Cons

  • Requires strong credit: Charge cards typically require a higher approval score than credit cards.
  • Less common: Finding the right charge card for personal use can require more research compared to choosing a credit card.
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Decide if charge cards are right for your finances

Choosing between a charge card and a credit card ultimately depends on your financial discipline, spending habits, and specific needs. Charge cards offer a unique blend of flexibility and responsibility, ideal for those who can manage full monthly payments.

Are you looking to raise your credit score? Learn how Chime can help you work on improving your credit score.

Chime® is a financial technology company, not a bank. Banking services are provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC. The Chime Visa® Debit Card and the Chime Credit Builder Visa® Credit Card are issued by The Bancorp Bank, N.A. or Stride Bank pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa debit and credit cards are accepted. Please see the back of your Card for its issuing bank.

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Opinions, advice, services, or other information or content expressed or contributed here by customers, users, or others, are those of the respective author(s) or contributor(s) and do not necessarily state or reflect those of The Bancorp Bank, N.A. and Stride Bank, N.A. (“Banks”). Banks are not responsible for the accuracy of any content provided by author(s) or contributor(s).

¹ Information from Consumer Financial Protection Bureau "Credit score myths that might be holding you back from improving your credit" as of April 14, 2024: https://www.consumerfinance.gov/about-us/blog/credit-score-myths-might-be-holding-you-back-improving-your-credit/

² Information from Experian "What Is the Difference Between Charge Cards and Credit Cards?" as of April 14, 2024: https://www.experian.com/blogs/ask-experian/what-is-the-difference-between-charge-cards-and-credit-cards/#s3

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