What is a charge card?

Similar to a credit card, a charge card is a form of credit that lets cardholders borrow money for purchases now and make payments later.

Unlike a credit card, charge cards typically don’t have a preset spending limit. But charge cardholders often have to pay their balances in full each billing cycle.

What you’ll learn:

• Interest charges typically aren’t associated with charge cards because they usually have to be paid off in full each month. 

• Charge cards may offer rewards, but they might also have high annual fees and significant late payment penalties.

• Charge card issuers may approve purchases on a case-by-case basis.

• Good or excellent credit scores are often required in order to be approved for a charge card.

Typical charge cards have no preset spending limits. That doesn’t mean cardholders have unlimited spending though. Instead, issuers often approve purchases individually based on spending behavior, payment history, credit history and other factors. 

Charge cardholders generally have to pay their balance in full at the end of each billing cycle, so there typically aren’t interest rates tied to charge cards. But late fees can be significant. For example, some issuers charge a percentage of the outstanding balance.

At a glance, they can seem very similar, but there are some important differences between charge cards and credit cards. Here’s a quick summary of some common differences.

If you’re considering a charge card, there are some possible benefits and disadvantages.

Charge cards can offer several benefits, including:

• No preset spending limit: Because a charge card doesn’t have a preset spending limit, it’s adaptable to cardholders’ needs. 

• No interest charges: A charge card typically must be paid off in full at the end of each billing cycle, so the card may not have an interest rate.

• Elevated rewards benefits: Some charge cards, like those offered by Capital One, allow cardholders to earn rewards.

Charge cards may not be right for everyone. Here are some things to consider.

• Fees: Charge cards can feature high annual fees and steep penalties for late payments.

• Strict repayment terms: In most cases, charge cards don’t allow cardholders to carry a balance from month to month. Instead, cardholders may be required to pay off their balance in full each month.

• Credit score requirements: Requirements may vary, depending on the issuer, but charge cards are often geared toward those with good or excellent credit scores.

Multiple factors affect your credit scores. And using a charge card can help or hurt your credit scores, depending on how you use it. For instance, keeping a positive payment history by paying off your charge card on time each month could help you improve your credit scores. A charge card can also influence other factors like the average age of your accounts and mix of account types.

But one credit-scoring factor that typically isn’t impacted by charge cards is credit utilization. Credit utilization is a ratio that measures how much available credit a person uses across all revolving credit accounts. Charge cards don’t have credit limits or allow cardholders to carry balances from month to month, so they’re not typically considered revolving credit.

Applying for a charge card is like applying for a credit card. Factors like income and credit scores generally play a key role when card issuers determine whether to approve an applicant.

Generally, good or excellent credit scores are required, but that can vary by issuer.

Charge cards can be a useful payment option, thanks to flexible spending terms and lack of interest charges. But they’re not always an option. If you’re working to improve your credit scores, you might consider a credit card instead.