What Is a Charge Card? Understanding How It Works, Advantages, and Drawbacks

Definition: A charge card is a payment card requiring the cardholder to pay the full balance each month without any interest applied.

Key Takeaways

• Charge cards have no preset spending limits, but require the balance to be paid in full each month. 
• Unlike credit cards, charge cards do not charge interest on unpaid balances. 
• Charge cards typically offer substantial rewards and perks but come with high annual fees. 
• Missing a payment can result in hefty fees and negatively impact your credit score. 
• Charge cards are becoming rare, with some now offering hybrid features allowing short-term balance carrying.

What Is a Charge Card?

A charge card is a payment card that requires the balance to be paid in full each month, with no interest charges. Unlike credit cards, charge cards have no preset spending limit. Failing to pay the full balance can result in major fees or penalties. Many charge cards offer attractive rewards, but also come with high annual fees. While less common today, some hybrid cards and alternatives provide similar benefits.

Understanding Charge Card Functionality 

A charge card is a branded card available for use anywhere the brand is accepted for electronic payment. Charge cards have similar features to credit cards, but there are distinct differences.

Charge cards allow unlimited spending without interest, unlike credit cards. However, they must be paid in full each month, which may limit use. With both credit and charge cards, missed payments get reported to credit bureaus and can substantially affect your credit score. Your credit score shows your creditworthiness and ability to pay on time and manage debts effectively.

Charge cards offer spending flexibility with no credit limits, but missing payments can lead to costly late fees. Some cards charge a flat fee, while others charge a percentage of the unpaid balance. Some cards charge a nearly 30% penalty APR that stays on your account for six months.

Real-World Example of a Charge Card

Pure charge cards are rare since they’ve been replaced by credit cards. However, American Express still offers various charge cards with no pre-set spending limit and high levels of rewards points. Some of these cards have no annual fee, while the Gold and Platinum cards have an annual fee of $395 to $695 respectively with late payment penalties.

American Express cards aren’t “true” charge cards because their “Pay Over Time” feature allows a few months of interest-free credit. The company also offers a “Plan It” feature, which allows you to split large purchases into monthly installments for a fee. However, both programs have limits, and any charges over those limits must be repaid by the end of the month.

Some charge cards give you the option of paying in full every month or carrying your balance for up to 60 days without paying interest as long as you make the minimum payment due.

Comparing Charge Cards and Credit Cards 

Charge cards and credit cards share similar features, but there are distinct differences between the two financial products.

Interest

Credit card: You can buy and pay off the balance later, but you’re charged interest on the unpaid balance. As long as you make the minimum monthly payment, you can allow the debt to remain on the card.

Charge card: Charge cards do not charge interest, as long as you repay the balance in full within the month or a specified time.

Spending Limit

Credit card: Credit cards come with a spending limit or credit limit. Some cards allow you to spend beyond the credit limit but charge an overlimit fee. However, credit cards typically don’t allow you to spend too far over the card’s credit limit.

Charge card: There are no pre-set spending limits with charge cards, allowing you to customize the card to your spending patterns. Charge cards’ flexibility can be valuable for business travelers with unpredictable monthly travel and entertainment costs

Fees

Credit card: Credit cards may charge fees, including late fees and annual fees. If you’re consistently late with your payments, the card company may increase the interest or annual percentage rate (APR) they charge you.

Charge card: Charge cards may impose higher fees than credit cards if you miss the payment due date or do not repay the balance in full by the deadline. For example, a charge card may charge a percentage of the unpaid balance as a fee. Some cards charge a penalty APR of nearly 30% if you miss a payment. The penalty APR may remain for six months.

A charge card can be more cost-effective than a credit card if you can pay off the balance each month. However, if you miss a payment, your credit score will take a hit, and the fees can be high and add up quickly.

Charge cards are also popular because of their travel-related rewards and benefits, oftentimes more generous than typical rewards credit cards. Cardholders can earn points and statement credits with their purchases, often with double and triple points on dining and travel expenses.

Card issuers offer cardholders exposure to a wide variety of standard items, luxury brands, and travel deals that can be purchased with points accumulated from a charge card.

Applying for a Charge Card: A Step-by-Step Guide

Applying for a charge card is similar to applying for a credit card. Many card issuers offer an online application, which can take less than an hour to complete and a credit decision within minutes. Typically, the lender’s decision on whether to approve your application will be impacted by your income and credit score.

When applying for a charge card, the creditor may ask for the following information:

• Your name
• Date of birth
• Social Security number
• Mother’s maiden name
• Monthly housing payments, such as your mortgage or rent payment
• Other debt payments
• Employment status
• Income
• Contact information, including phone number, address, and email

Card companies use your Social Security number to check your creditby performing a hard inquiry, which is when creditors pull a copy of your credit report. During a hard inquiry, a creditor views your credit history, including if you have any late payments, your total amount of outstanding debt, and the number of open accounts. Hard inquiries can trim a few points off your credit score, so it’s best to limit the number of charge card applications to minimize the impact. 

After submitting the application, the card company will review your details and either approve or decline your application. If approved, you will need to wait to receive the credit card in the mail. However, some card companies offer a digital card number to use for purchases online. 

Important

Charge cards require a credit application, but approval is typically reserved for high-quality borrowers with good to excellent credit.

Advantages and Disadvantages of Charge Cards 

Because charge cards do not have a set spending limit, you can charge an unlimited number of purchases to your card. However, the downside is that you need to pay the balance in full every month otherwise, charge cards generally levy stiff fees and penalties on unpaid balances.

From a financial perspective, charge cards pose little danger to your financial well-being if you pay the balance. They discourage or make it impossible to carry a balance, so the temptation to buy what you can’t afford or accumulate debt is minimized.

Charge cards typically include a high annual fee of up to $500. Despite the annual fee, some consumers prefer charge cards because they avoid the interest-related expenses of using a credit card. Interest rates charged by credit cards are typically high.

Though many credit cards offer awards and perks, charge cards tend to offer more lucrative rewards and can be a good option for business travel.

Pros

• No spending limit
• No interest charges
• Attractive rewards and perks

Cons

• Must pay off the balance each month
• Hefty fees if balance is not paid off monthly
• High annual fee

Tip

If you’re concerned by potentially high fees but still want to earn rewards, it’s worth keeping in mind that some rewards credit cards require no annual fees.

What Is the Purpose of a Charge Card?

Charge cards can be used for business expenses or to maximize the benefits of your card spending. If used responsibly—that is, by paying off the balance every month—they can also be used to build credit.

Can You Build Credit With a Charge Card?

Yes, though this can be a risky way to build credit. If you are able to pay off the card balance every month, your credit score will start to improve. However, if you miss a payment, you will be hit with high fees, and can adversely affect your credit score.

Do Charge Cards Still Exist?

Charge cards are rare, but some card issuers still offer them, such as for purchasing gas. American Express was a primary issuer of charge cards, but they’re not true charge cards since Amex offers payment flexibility through its Pay Over Time and Plan It programs.

Charge card features come with no pre-set credit limit and various rewards for purchases. However, some Gold and Platinum cards charge high annual fees that cost hundreds of dollars.

Is a Debit Card a Charge Card?

No. Debit cards are not charge cards. Debit cards deduct the purchase amount from your checking or savings account immediately. Unlike charge cards, where you make a purchase and repay it at the end of the month, debit cards require the funds to be in your account for the purchase to get approved. However, debit cards can help you avoid spending money you don’t have, while a charge card is a type of credit that must be repaid every month.

The Bottom Line

A charge card must be paid in full each month, which avoids interest charges. Unlike credit cards, charge cards have no preset spending limits, letting cardholders charge larger or variable expenses. They often come with attractive rewards and perks, though high annual fees are common. When used responsibly, they can build credit, but missed payments can lead to steep penalties and negatively impact credit scores. True charge cards are increasingly rare, as many issuers now offer hybrid cards that blend features of charge and credit cards.