How Do Charge Cards Work?

Charge cards, like other types of credit cards, can be used to make purchases and may earn rewards. However, unlike other credit cards, they’re typically designed to be paid off in full each month, and some don’t have a preset spending limit. Cardholders usually don’t pay interest charges, since there’s no revolving balance unless your card offers a pay-over-time feature.

More than 12 million adult consumers in the U.S. carry charge cards, according to a Federal Reserve Bank of Boston report released in 2017. Here’s a look at how charge cards work and why some consumers choose to carry this type of card.

Charge Cards vs. Credit Cards

Here’s a breakdown of how charge cards compare with credit cards :

Feature Charge cards Credit cards
Charges APR No, except for cards that offer a feature to pay expenses over time Yes
Has a preset spending limit Depends on the issuer Yes
Requires users to pay in full each month Yes, except for cards that offer a pay-over-time feature No
Charges late payment fees Yes Yes
Influences credit scores Yes Yes
Charges an annual fee Depends on the card Depends on the card

While both types of cards typically charge late fees and influence your credit history, every card is different. For example, some credit cards don’t charge an annual fee, and some offer an introductory zero percent annual percentage rate. Some charge cards don’t have preset spending limits, but some do.

Usually, charge cards must be paid in full each month. However, American Express’ pay-over-time feature lets some cardholders create two balances on the same account: one that must be paid off in full each month, and one that can revolve and has flexible payment options. The pay-over-time balance comes with an APR, so any unpaid charges will incur interest fees.

[Read: The Best Credit Cards with High Credit Limits.]

Benefits of Charge Cards

Charge cards come with some enticing perks, but it’s always best to read the fine print to see if they’ll work for you.

No preset spending limit: When applying for a charge card, certain issuers won’t set a balance limit. This can be advantageous if you want the option to make large purchases.

“That said, these cards don’t allow you to spend to the moon,” says Linda Sherry, director of national priorities at Consumer Action, a consumer advocacy and education nonprofit.

For example, with American Express charge cards, the amount you can charge dynamically adjusts with your spending habits, payment history, credit and other factors. Every charge card issuer may have different rules, so research spending limits before applying for a card.

Lower risk of debt: According to the Federal Reserve Bank of Boston report, half of those who didn’t have a credit card said it was because they wanted to keep debt under control.

Charge cards without a pay-over-time feature may be a good fit for those who have no appetite for credit card debt, since the balance is paid off each month. Some consumers need that built-in discipline, says Ashley Feinstein Gerstley, author of “The 30-Day Money Cleanse.”

If it can mentally help keep you from overspending, then it could be a good tool, depending on the individual, she says.

Earn rewards: Many charge cards come with perks, which may include personal concierge services, travel accident and luggage insurance, extended warranties, and roadside assistance. Cardholder rewards may also include access to ticket sales for special events or points that can be redeemed for airline miles, hotel stays or gift cards. Although charge card rewards have the potential to be lucrative, they could be similar to what you’d find on a credit card.

Drawbacks of Charge Cards

Charge cards aren’t made for every consumer. Fees, the inability to carry a balance and limited options are a few reasons why.

Late fees: If you’re tardy with a payment or miss one altogether, you may have to pay a late fee. Every issuer has a different system for these. With an American Express charge card, you’ll pay $27 the first time you’re late with a payment. That rises to $38 if you make another late payment within six billing cycles. A Diners Club card may charge up to $35 or 2.5 percent of the balance as a late fee.

Card issuers typically won’t report late payments to the credit bureaus until they’re a full billing cycle behind, according to Experian. But just one skipped payment could drag down your credit score.

Annual fees: Charge cards may have an annual fee, which can range from $95 to $550 — although some waive their annual fee for the first year.

But annual fees may be worth it for charge cards that come with good rewards and cardholder benefits. “You’re almost willing to pay a higher annual fee because of the value you’re getting with the card,” says John Ulzheimer, credit expert formerly with FICO and Equifax.

Ulzheimer uses two credit cards and one charge card. After doing the math, he says his charge card’s benefits are worth thousands of dollars, which far outweigh the $450 annual fee.

Before applying for a charge card, check for an annual fee and compare it to the card’s potential rewards value to see if it’s worth it to you.

[Read: The Best Rewards Credit Cards of 2018.]

No balance: Paying your balance in full each month is a great way to avoid debt — if you can actually pay it off.

Maybe you didn’t earn as much this month at work, or you had unexpected expenses. If you’re having financial troubles, you may have to choose between missing a payment or borrowing from your savings to pay off the charge card balance. That’s why, in some cases, it could help to carry a credit card, too.

“While we don’t advocate people carrying a balance, you can carry a balance on a credit card as long as you make the minimum payment,” says Sherry. “You could make a choice. For example, pay off a large balance in three large installments. It’s up to you.”

Limited options: Those in the market for a new credit card have myriad options from hundreds of issuers at all levels of credit. Potential charge card customers have fewer choices. American Express and Diners Club are the main charge card issuers, each offering a handful of options, which may be limited to those with good or excellent credit.

How Charge Cards Affect Your Credit

Generally, using charge cards responsibly can help you build healthy credit. “The advice to properly manage credit still holds true for charge cards as it does for credit cards,” says Ulzheimer. As with other types of credit cards, it’s a good idea to make charge card payments on time and keep older accounts open.

However, unlike other credit cards, credit utilization is not a factor for charge cards. Credit utilization is the calculation of how much credit you’re using compared with how much you have available. If you use too much of your available credit, it can adversely affect your credit score. Because most charge cards don’t have a preset credit limit, they aren’t part of the credit utilization calculation. Spending a lot on your charge card won’t hurt your credit as long as you pay off the balance in full and on time.

How to Use Charge Cards

Consumers who use charge cards may also carry credit cards in their wallets, according to the Federal Reserve Bank of Boston report. No matter what your card mix looks like, Ulzheimer says, it’s ideal to pay them in full and on time every month.

“Someone who is a responsible user of plastic really should never tell the difference between whether they whipped out a credit card versus whipping out a charge card,” he says.

If you need to make a purchase that can’t be paid off in one month, then you could use the credit card instead of the charge card. Feinstein Gerstley says that in a pinch, you can transfer a charge card balance to a credit card — often for a fee. It can act as a safety net. But, she warns, having a credit card open may tempt people to use that available balance. “The key is to not change your spending habits despite what you have open,” she says.

If you do need to use your safety net one month, make a plan to make at least the minimum payment on that credit card and pay it off as soon as possible.

[Read: The Best Low-Interest Credit Cards of 2018.]

Is a Charge Card Right for You?

The answer may lie in how much you earn compared with how much you spend each month — and whether you can easily pay off those expenses. Charge card holders may have flexible spending power, but it comes with the responsibility of paying off the balance in full.

If you can balance the benefits and drawbacks of using a charge card, it may be a good fit for you. Pocketing a second credit card for emergencies won’t hurt, as long as you also use it responsibly.

“It’s never worth having a card if you’re not able to pay it off and you’re incurring interest,” Feinstein Gerstley says. “It’s never worth the benefits — or the mental stress.”

More from U.S. News

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10 Questions Every College Student Should Ask Before Getting a Credit Card

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