Credit card vs. charge card: Differences and similarities, explained

What is a credit card?

A credit card is a type of payment card that acts like a loan. It provides users with a predetermined credit balance (or credit limit) and comes in many forms with different perks and rewards. The credit limit and the amount of interest charged depend on the type of card, the institution, and the user’s credit score.

Users can pay statement balances a bit at a time over multiple months, although most cards require minimum payments.

Here’s how they work step by step:

1. User makes purchases up to the credit limit.
2. Card’s institution pays the vendors and merchants.
3. Users can partially pay the balance with a minimum payment.
4. Any unpaid balances accrue interest at the end of a statement cycle.

What is a charge card?

A charge card is also a payment card that gives users access to credit. However, cardholders can't use it to carry a balance over multiple months.

Failure to pay the balance in full may incur significant late fees, account issues, and credit consequences.

Here’s how they work step by step:

1. User makes purchases with no pre-determined limit.
2. Card issuer pays the vendors and merchants.
3. Card issuer may impose limits based on spending and repayment habits.
4. User pays the balance in full at the end of each statement period or over time, depending on the card issuer.
5. Card’s institution adds late fees for any unpaid balance.

The key differences between charge cards and credit cards

The key distinction between a charge card and credit card is that credit cards operate on revolving credit, and charge cards do not. This creates key differences in how they function and the impact they have on a person’s finances.

1. Consumer protections

Consumer protection legislation, like the Truth in Lending Act, regulates both credit cards and charge cards.¹ The differences in protection for each type of card are based on relevance.

Legislation about credit cards also applies to charge cards, where applicable, so many of the consumer protections are the same.

With both card types, consumer rights include:

• Reporting credit card fraud and disputing charges.
• Requesting refunds on purchases for eligible reasons.
• Transparency from the card issuer about interest rates, fees, and penalties.²

2. Credit score requirement

Credit cards can serve many individuals, while charge cards require a history of payment discipline. People can leverage higher credit scores to acquire better terms and perks for both types of cards.

• Credit cards are available for people with any type of credit or no credit. Users with poor credit may be limited to secured credit cards.
• Charge cards have strict credit standards and are generally only available to people with good to excellent credit scores. A FICO score of 670 or higher is considered good.

3. Credit utilization

Credit utilization is the difference between a person’s available credit and the amount of debt they currently hold. For example, if a consumer has one credit card with a limit of $6,000 and a balance of $2,000, their credit utilization is 30%.

Credit cards can contribute to credit utilization because:

• There is a maximum available credit that users borrow against.
• Users can carry balances against that credit over multiple periods.

At any given time, it’s easy to calculate a credit card’s impact on utilization.

Charge cards generally don’t count toward credit utilization because:

• They don’t have a credit limit.
• Cardholders typically pay balances in full each month.

This makes it difficult to calculate a charge card’s impact on utilization because neither the limit nor the balance is consistent.

4. Fees

Credit cards and charge cards can both have annual fees and late fees. Generally, the fees for charge cards are higher.

Annual fees

Annual fees are the cost to hold an account open each year, no matter how the individual uses it.

• Credit cards often have low or no annual fees, but this can vary. ​
• Charge cards have annual fees that often range from $150 to over $600. Some corporate cards may have $0 fees.

Late fees

Failing to pay the minimum balance comes with late fees for each type of card.

• Late fees on credit cards are usually small fees in addition to accrued interest.
• Late fees on charge cards are often large and can be a percentage of the unpaid statement balance.

Credit cards require minimum payments that include:

• Interest accrued on the entire balance that month.
• A portion of the remaining balance.

For charge cards, late fees will apply to any remaining balance after a statement.

5. Interest

Interest is a fee that lenders add to loans. The amount added is a percentage of the existing balance. Any payment a user makes applies to interest before the principal balance.

Credit cards and charge cards handle interest differently:

• Credit cards have standard interest rates that users pay at the end of a statement period.
• Charge cards do not accrue interest, but late fees are usually a percentage of the balance.

The type of interest on credit cards is known as APR (annual percentage rate). When a cardholder carries a balance into a new statement period, the card issuer applies the APR to the full balance.

6. Liability for unauthorized transactions

Both credit cards and charge cards fall under federal standards for consumer liability protection.

As long as cardholders take reasonable and timely steps to inform the financial institution of card loss or theft, liability is limited to $50¹

Many cards beat this standard and include zero liability for lost and stolen cards. Read the terms and conditions for each card to understand fraud reporting responsibilities.

7. Payments

Credit cards allow users to hold a balance over multiple months. Each statement cycle has an associated minimum payment, and carrying a balance across statement cycles accrues interest.

Failure to pay the full balance on charge cards each month can have severe consequences. Most cards will have associated late fees, and institutions may send accounts with a history of late payments to debt collections.

8. Selection

Credit cards are widely available and come in many forms. Credit-builder and secured credit cards can help people with no credit history or bad credit improve their scores.

People with good credit can sign up for credit cards with higher limits, lower APRs, and various other perks and rewards. Most financial institutions offer multiple kinds of credit cards.

Charge cards are rare, especially in the U.S. There is a limited selection available to consumers and businesses.

9. Spending limits

Credit cards have a preset maximum balance based on factors like credit score. Once the cardholder reaches the card's credit limit, they can’t spend more until they pay the balance down.

Charge cards don’t have a preset maximum. There is no predetermined cap on what users can spend. However, the issuing institution may impose limits based on spending habits, repayment habits, income, or other factors.

Credit and charge card considerations

Both credit cards and charge cards allow people to access credit and choose how they spend it.

Because their balances function differently, they’re each useful in different situations.

Charge card considerations:

• Often used by business owners and persons authorized by a business
• Often come with rewards that encourage high spending, making them potentially easy to mismanage.
• Require good credit
• The balance must be paid in full with every statement
• Users should only make purchases with charge cards that they know they can afford that month​​

Credit card considerations:

• Available to most people, depending on credit score
• Commonly used for online purchases. Virtual credit cards help make online purchases secure
• Useful to spread balances over time, but users must carefully budget the monthly payments to ensure they can afford them
• Many credit cards offer deferred interest promotions if cardholders pay the balance in full before the promotional period ends

Both types of credit come with risks:

• Users should take care not to overspend
• Failing to account for interest can make credit bills unmanageable
• Failing to pay statements will result in fees and a reduction in credit score
• Lenders may send accounts with a history of non-payment to collections, which may involve wage garnishment

Credit inquiries

Whenever someone applies for loans or credit, the institution requests their credit information from credit bureaus. Applying for both credit cards and charge cards involves credit inquiries.

There are two types of credit inquiries:

• Soft inquiries don’t appear on credit reports and don’t impact credit scores.
• Hard inquiries appear on a report and remain there for two years. Hard inquiries temporarily lower credit scores, though not by much.

Most credit applications involve hard inquiries, so it’s important not to submit too many applications in a short period of time.

Card options all in one place with PayPal

The most important things to remember about credit cards vs. charge cards are availability and how balances work.

Credit cards are widely available and, when used responsibly, helpful for managing large purchases over time.

Many credit cards offer temporary 0% APR promotions that allow users to pay a balance over multiple months with no interest charges.

With PayPal's credit services, users can apply for a cashback Mastercard that allows them to access credit and earn cashback on eligible purchases.³