What is the Difference Between a Charge Card and a Credit Card?

The primary difference is that typical charge cards do not provide credit. Instead they require you to pay off the entire balance each month. 

With credit cards, you can pay down your purchases over months (or years). You will be charged interest for not paying the full balance by the payment due date. Charge cards have dwindled away until American Express remains the only significant charge card issuer within the United States. 

Most retail stores have replaced their charge cards with revolving credit cards. 

Charge cards look and work like credit cards when it comes to making purchases. They both have such common elements as travel perks and rewards. Yet charge cards do not offer balance transfers (with their attractive zero percent interest rate promotions) as they do not allow you to carry a balance. 

Charge cards offer a few key benefits. They do not come with a pre-determined credit limit. This feature allows you to do large purchases on the card. Instead the amount that you can charge is determined by your credit score and history, payment history, financial resources, and typical charge card use. You can determine your charge card spending limit online or over the phone (the number is printed on the card’s reverse). In contrast, credit cards always come with a pre-set limit that does not change often.  

Another benefit to charge cards is that they do not include interest or incur debt. This is because you will be required to pay the balance in full each month. The charge card forces discipline on your finances this way. The principle has been diluted by American Express sometimes offering a “Pay Over Time” feature. This separate account within the card only applies to larger purchases (in excess of $100) as well as travel purchases that are eligible. The “Pay Over Time” feature comes with finance charges if you do not pay the balance in full when it is due. 

A key benefit from charge cards has always been their generous perks and rewards, particularly where travel is concerned. This is less of an absolute advantage these days as some credit cards (like the Chase Sapphire Preferred Card) now offer many features and rewards that are comparable to American Express’ rewards program. 

A last key benefit is the impact on credit scores of using charge cards. Scoring models (like FICO and Vantage Score) do not take charge card balances into account with their credit utilization component. 

Since they can not calculate a ratio on these charge card balances without a limit, you can make larger or more purchases in a given month without negatively impacting your credit score.

Do I Need to Have a Credit Card to Improve My Score?

If you do not have a credit card you may wonder is it important for your credit score that you get one. The fact is, that employing a credit card in your financial life directly impacts the most critical factors that make up your personal credit score. This includes a timely payment history (35 percent of the total) and credit card utilization (30 percent). 

Obtaining a credit card to use routinely (but responsibly) is among the fastest and most efficient means of either building up or rebuilding your credit profile and score.  

Keep in mind that credit scores quantify the way that you manage money which you borrow and repay. Having good credit requires that you possess a solid record of timely debt payments. Not making payments on something like a credit card means that you not only do not have good credit, but you also may have no credit. Making regular charges on a credit card allows you to build up credit without having to go into debt. 

So long as you completely pay off your credit card balance every month on time, your issuer will report these credit card payments to each of the three main credit bureaus. 

Treating your credit card like it is a debit card (charging only things that you can pay for each month) will keep you from paying interest on purchases and allow you to rapidly build up your credit. 

Just remember that you need to keep your charges each month to less than 30 percent of your credit card total available balances so that you do not lose points in the critical credit card utilization category (the second most important consideration for FICO credit scores).