Credit Card vs. Charge Card: What’s the Difference?

“Credit” and “charge” are interchangeable terms in the world of credit, or are they? I’ll confess, I didn’t truly understand the difference until recently. On a quest to find a credit card with airline perks, I stumbled onto the American Express Platinum card. A line within the terms and conditions read:

“All charges made on this charge card are due and payable when you receive your periodic statement.”

Translation? This AMEX option is a charge card. I scanned the legal jargon for more information. “This card requires excellent credit, so what’s the catch?” I thought. “What’s the difference between a credit card and a charge card?”

Learning the basics of credit accounts is imperative to maintaining a positive score. Decipher the differences below before applying for your next account. What you learn may impact your decision.

What is a credit card?

A credit card is a revolving account that allows you to make purchases and carry a balance from month to month. While you have the option of paying your debt at the end of each cycle, you may also choose to make a minimum payment. Remaining balances are usually subject to steep compounding interest, adding to the principal balance and making it more difficult to eliminate the debt each month.

What is a charge card?

Like a credit card, a charge card allows you to make purchases without cash. Unlike a credit card, the balance must be paid in full every month, i.e., you may not carry debt from one cycle to the next. Failure to pay will result in a late fee or other penalty. Like credit cards, some charge cards come with annual fees.

How does each affect my credit score?

Both credit options have the ability to help or hurt your credit score. Take precautions by:

  • Paying your bills in full (if applicable) and on time (always)
  • Maintaining a healthy credit utilization. Learn more about tips and tricks here.
  • Using your card for specific purposes, e.g., groceries and entertainment only. Assigning tasks to each account will help you avoid overspending.

Is one better than the other?

It depends on your situation. A credit card is best if you are able to manage revolving debt without becoming overwhelmed. On the other hand, a charge card may work for those who want to eliminate the risk of compounding interest by paying their entire balance at the end of each month. Credit scoring is a complicated process, but it is well defined by the Five Factors:

  • Payment history
  • Debt utilization
  • Credit length
  • New credit
  • Diversification

Apply the principles found in these rules to every credit card you own. Whether you choose credit or charge, the result will ensure maximum score strength.