What is the difference between a credit card and a charge card?

You may think that there isn’t any difference between a credit card and a charge card, but there is.  In fact, other than both being made of plastic and being issued by a bank there are few other similarities.

Charge card


Charge cards require full payment each month, normally charge an annual fee, don’t charge interest, and don’t set a published credit limit. There usually is a “shadow limit” which is the upper boundary of what you can charge on it.  The American Express green card is a good example of a commonly recognized charge card.

Charge cards are a good way to built credit and avoid debt, if you don’t sign up for the version that lets you carry a balance.  Not every business accepts charge cards, because of the fees charged to businesses.  Since there is no credit limit, the highest balance on the account is reported to the credit reporting agencies.  If this is one of the few accounts that you have, this can have an impact on your credit score if the score is calculated from older scoring software versions.

One of the key factors that can have a major impact on your credit score is how much of your credit you have used or your “utilization.” This is calculated by dividing your total balances by your total credit limit (or high credit if limit is missing).  If this was your only card and your balance is $1,000 and the maximum you have charged was $2,000; your utilization is 50%, which is considered high and will impact your score negatively.  Again, this doesn’t impact newer versions of credit scores, but many issuers are still using older versions.

Credit card


You are probably very familiar with credit cards, which are usually VISA, MasterCard or Discover Cards offered by a financial institution such as a bank or credit union.  They have credit limits that can range from several hundred to tens of thousands of dollars.  There are prestigious cards issued under the silver, gold, or platinum monikers and many of them offer rewards or cash back.  You don’t have to pay your bill in full each month and you can roll a balance from one month to the next, often referred to as revolving a balance.

Credit cards don’t always have annual fees but some do charge annual fees.  Most credit card issuers report the credit limit to the credit reporting agencies. You still need to keep your balance low compared to your credit limit to keep your credit score down.  One advantage is you don’t have to pay in full each month, but you pay the price with interest charges for this privilege.  It is easier to get into financial trouble because you are not required to pay the balance in full and credit limits can be very high.



Both card types make purchases very convenient because you can use them to make purchases and pay later.  You don’t have to carry around a checkbook or a bunch of cash.  All of the major card issuers report to the credit reporting agencies, so they can both help and hurt your credit.  Almost all retailers accept credit cards…except for Peter Luger’s in Brooklyn, where I found out the hard way you need cash or a check!!

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

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