We often use the term “credit card” generally to refer to cards that allow us to make purchases that we can pay for later, but there are also charge cards (often called hybrid cards or cards with no preset spending limit).
In this post, I want to discuss the differences between these cards, as there are some important differences. What is the difference between a charge card and a credit card?
What is the difference between a charge card and a credit card?
What’s the difference between a charge card and a credit card? You may have used a charge card without knowing it, so let’s go through the details in no particular order…
Charge cards have no preset spending limit
Perhaps the most obvious difference between a charge card and a credit card is that the former has no preset spending limit, while the latter has a credit limit.
With a traditional credit card, there is a specific maximum amount that you are allowed to spend and that you cannot exceed. However, with a charge card, the maximum amount you can spend is not fixed.
To be clear, this doesn’t mean you can spend unlimitedly. While there is still a maximum amount you can spend, you won’t be told how much it is. Charge cards are also more likely to adapt to your spending habits over time, so you may quickly see your ability to spend increase.
Overall, cards without a preset spending limit generally allow you to spend more than cards with specific credit lines, but this is not always the case.
Charge cards must be paid in full each billing period
With a credit card, there is a minimum amount you have to pay each billing cycle, but then you can finance the rest of your bill over time. I generally wouldn’t recommend this as credit card interest can be very high, so I wouldn’t recommend getting money this way.
Charge cards typically require you to pay off your balance in full each billing cycle. This distinction blurs a little because many charge cards allow you to enter into an installment plan, but this is something you usually have to explicitly agree to, and unlike credit cards, not all cards offer it.
Credit cards are not counted towards credit utilization
It’s important to maintain a good credit score, and credit utilization makes up 30% of your credit score. Credit utilization is how much of your available credit amount you’re using, and is usually measured at the time your statement closes (but there are some tricks to lower this score).
While your credit card spending habits contribute to your credit utilization, your charge card spending does not. That’s because there is no preset spending limit and therefore no denominator to measure your credit utilization.
A higher credit rating may be required for credit cards
While there are some credit cards for people with bad credit, there aren’t actually any charge cards for people with bad credit. I don’t think this affects most OMAAT readers, as those of us who rely on miles and points generally have good to excellent credit, which is required for many premium cards. Plus, we grab these cards for the rewards they offer, not to get access to a line of credit.
The reason for this distinction is that there are many secured credit cards available for those building their credit. The same concept wouldn’t really work for a card without a preset spending limit.
The Amex Five credit card limit is worth considering
Admittedly, this is a niche issue for the average consumer, but it’s worth noting that this difference can sometimes impact whether you get a card. Amex, for example, has a five-credit card limit, so most consumers won’t be able to get more than five credit cards from Amex, whether personal or business.
However, the following cards, which do not have a preset spending limit, will not count toward this limit:
This way, you can easily keep more than five Amex cards at the same time.
Should you apply for a charge card or a credit card?
Personally, I have a mix of credit cards and charge cards. I choose cards based on their overall value proposition rather than this specific distinction. Just as an example, the Capital One Venture X Rewards Credit Card (review) is a traditional credit card, while the Capital One Venture X Business (review) has no preset spending limit—I have both and find them both worthwhile.
For some people, I think this difference is more important. For example, if you frequently make very large purchases that are close to the credit limit of a traditional credit card, you may be better off with a charge card because these purchases will not count toward your credit utilization.
On the other hand, if you don’t make large purchases often, having a credit card may make sense, as your spending habits can improve your credit score.
Conclusion
While most people know what a credit card is, fewer people are familiar with charge cards (or cards with no preset spending limit, or hybrid cards as they are sometimes called). There are a few key differences, such as charge cards having no preset spending limit, must be paid in full each billing cycle (at least without signing up for a payment plan), don’t count toward credit utilization, and more.
What do you think about the difference between credit cards and charge cards?
