What’s the Difference Between Credit Cards and Charge Cards?

Do you know the difference between a credit card and a charge card?  A credit card has a preset spending limit and you’re generally allowed to charge up to that amount.  A charge card has no published spending limit but does have what’s referred to as a “shadow limit”, which is the unpublished spending limit.  A credit card allows you to pay some or all of the balance due, meaning you can roll or revolve some of the balance every month.  A charge card requires that you pay the balance in full by the due date.

Charge cards do not charge interest, because in order to charge interest you have to apply an interest rate to an amount not paid in full by the due date.  Credit cards do charge interest, but only if you don’t pay your bill in full each month.  Charge cards are almost always issued by American Express.  Credit cards are issued by over 10,000 financial services companies, including American Express. Charge cards almost always have annual fees.  Credit card issuers would love to charge you annual fees, but many credit cards do not have annual fees.

Credit cards require a credit application and a cardholders agreement…so do charge cards. Your activity on credit cards is reported to the major credit reporting agencies, Equifax, Experian and TransUnion…so is your activity on charge cards.  Credit cards can help or hurt your FICO scores.  Charge cards can help or hurt your FICO scores.

You can get into crushing credit card debt with credit cards.  You can’t get into crushing credit card debt with a charge card.  It’s easier to stay out of debt when you have a perpetual $0 balance each month.

A credit card looks like a charge card.  A charge card looks like a credit card.  They both look like prepaid debit cards, gift cards and ATM cards…but don’t act the same way when swiped.  Both can be stolen but both offer great protections under the Fair Credit Billing Act.

You can’t buy a Porsche with a credit card, unless your credit limit is over $90,000 (for their entry level model), but theoretically you could with a charge card.  You can fill up your gas tank, pay for new tires, have your Porsche cleaned and upgrade the stereo system with a credit card, and a charge card…meaning they’re both accepted pretty much at the same places.

Credit limits are not reported on charge cards because they don’t have credit limits. Credit limits are reported on almost all credit cards, but there are exceptions. FICO scores consider charge cards when calculating their credit card utilization measurements, except for in their new generation of scores.  FICO scores consider credit cards when calculating their credit card utilization measurements in all of the currently available FICO risk scores.

Credit Expert Witness, 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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