What Exactly Is a Charge Card?


Charge cards are kind of like a cousin to the standard credit card. These payment cards evolved from systems that allowed customers to “run a tab” at retailers. Today, some charge cards are still offered as an alternative to traditional credit cards, but you may still be wondering exactly what they are. Here’s what you should know about what makes charge cards different than your standard credit card.

You Usually Can’t Carry a Balance …

The fundamental difference between a credit card and a charge card is that a charge card doesn’t normally permit you to carry a balance. All charges that appear on your monthly statement are expected to be paid in full by the due date. If you typically carry a balance on your card, or know you will, a credit card may be a better option for you. Just remember to use either responsibly, as you don’t want to find yourself in credit card debt.

… Unless You Can

If this is important to you, and you still really want a charge card, you may be able to speak with a charge card issuer and see if they allow you to carry a balance, even once in a while. For example, American Express offers the Pay Over Time option to many of its business and personal charge card holders. By selecting this option, cardholders are allowed to pay eligible charges of $100 or more over time. Cardholders can even select individual charges to be paid over time, or can choose to have all travel-related charges eligible for extended payments with the Sign & Travel option.

Say Goodbye to That Spending Limit

Well, sort of. With a credit card, you are usually assigned a credit limit, but most charge cards don’t have a specified limit. That doesn’t mean that your line of credit is unlimited, however. It just means that the maximum amount you are authorized to charge can vary based on your spending and payment habits, as well as your current credit history.

Pick Up the Phone Before Making That Big Purchase 

Because charge cards generally have no pre-set spending limits, it’s harder to know if a charge is going to be approved automatically. Therefore, charge card users should consider contacting their card issuer for pre-approval before making any unusually large charges.

What About How it Affects Your Credit?

With no pre-set spending limit, it’s difficult for credit bureaus to determine how much available credit you have. This is important because your debt usage (or credit utilization) is a component of your credit score that indicates how much of your available credit has been consumed. In many situations, charge card issuers will report your credit limit as the highest balance you’ve had. So, if your $1,500 car repair charge last month was the most you’ve ever put on your charge card, that would likely be considered your limit when reported to the credit bureaus. Keep in mind, experts recommend keeping your debt below 30%, and ideally lower than 10%, of your credit limit for the best effect on your credit scores. (You can see how your spending habits are affecting your credit score by taking a look at your free credit report summary, updated each month, on Credit.com.)

Don’t Forget to Make Your Payments On Time

This is true for both charge cards and credit cards, as late payments can affect your credit score. But, because charge card users agree to pay their entire statement balances in full, it only makes sense that there are hefty penalties for failing to do so.

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