The terms “charge cards” and “credit cards” are sometimes used interchangeably, but these two payment cards have distinct features and impact credit scores in different ways.

What is a charge card?

A charge card is a card that requires payment in full every month. It doesn’t have a preset limit; rather, purchases get approved based on spending and payment history, financial resources and credit record. Since charge card balances must be paid in entirety by the due date, there is no interest rate or minimum payment. If the bill is not paid on time, late fees and other penalties may ensue, depending on the card agreement.

Credit cards have a credit limit and permit users to carry a balance at an agreed-to interest rate.

Some charge cards do come with the option to revolve a portion of the debt. For example, American Express provides eligible charge card holders with flexible payment services, which allow the member to pay certain transactions over time. Revolved balances incur finance charges.

Who issues charge cards?

Diners Club issued the first charge card, made of cardboard, in 1950, and American Express came out with a plastic charge card nine years later.

Today, American Express is the dominant issuer of charge cards. In fact, virtually no other issuer offers this type of product for consumers. Although a handful of retail stores and gas stations still issue in-house charge cards, the more common practice today is for stores to offer a co-branded Visa or Mastercard credit card.

The application process to get a charge card is similar to that required to obtain a credit card. But if your credit is less-than-stellar, some credit cards might be easier to qualify for then an American Express charge card, as the issuer is known for only approving applicants with excellent credit, according to Ulzheimer.

Check your credit score to see if you’ll qualify.

Why use a charge card?

Charge cards build credit history without getting the user into expensive debt, since the balance must be repaid in full by the due date.

As with credit cards, charge cards may come with rewards — for which you’ll pay an annual fee. For example, American Express charge card holders get access to the Membership Rewards program.

Generally, charge card holders can spend large amounts on their card without hurting their credit score.

Who should apply?

Charge cards usually require good to excellent credit.

How do charge and credit cards differ in how they impact credit scores?

Both charge card and credit card payment histories are reported to the credit bureaus and using one can help a consumer’s credit score.

Exactly how a charge card affects a credit score can be more complex than a credit card’s influence.

The ratio of balances-to-credit limits on revolving accounts, or utilization, is a heavily weighted component in credit score algorithms. Consider the widely used FICO credit score developed by FICO, and the VantageScore developed in concert by the three major credit reporting agencies — Equifax, Experian and TransUnion. Utilization counts for a good portion of a factor worth 30 percent of a FICO score, while it contributes 23 percent of a VantageScore credit rating.

Aside from the fact that charge cards are not revolving accounts, they also lack credit limits. For this reason, VantageScore and newer versions of the FICO scoring model exclude charge card balances from utilization. Thus, high balances on charge cards do not impact the person’s debt ratio.

In previous editions of the FICO score, charge card balances did factor into utilization. The “high credit” for the account was used in place of the limit. “High credit” refers to the largest monthly balance a cardholder has had during a period of time.

VantageScore incorporates the maximum credit when looking at the sum of all the credit lines owed by the consumer, but not in credit card utilization, according to Sarah Davies, senior vice president of product management and analytics at VantageScore Solutions, LLC.

In other words, the high credit on a charge card shouldn’t impact utilization in most cases. “We believe that the majority of scores that are being used out there currently exclude charge cards from utilization,” says Barry Paperno, the consumer operations manager for myFICO.com.

As for the scores sold to consumers through myFICO.com, the TransUnion FICO score still includes charge card balances in utilization. The firm plans to switch out the old model for a newer version that excludes charge cards from the debt ratio.

Charge cards count toward the other factors that make up the score, including payment history and length or depth of credit history.

Bottom line: Charge card vs. credit card?

The terms “charge card” and “credit card” are often used interchangeably, but they aren’t identical. Here’s why:

  • Spending limit: A charge card has no preset spending limit, but that doesn’t mean spending is unlimited. Instead, the limit is dynamic and adjusted to reflect the customer’s perceived spending capacity.
  • Interest: A charge card must be paid in full each month, so no interest is charged.
  • Late fee: Instead of charging interest, an unpaid charge card balance incurs a late-payment fee that’s typically a percentage of the past due late amount. For example, if you are late on a $10,000 charge card bill, and the late payment penalty is 2.99%, you’ll owe an additional $299.
  • Annual fee: All charge cards have annual fees, although some may waive them the first year. Although some credit cards also charge annual fees, there are many that do not.

In the past, charge cards also were associated with rich rewards on spending and upscale perks that were unmatched by what credit cards were offering. But over the past few years, credit cards have increasingly upped the rewards ante, with several premium credit cards offering rewards and high-end extras rivaling those of the highest end charge cards.