What are charge cards and are they right for me?

You may have heard of a charge card, but might be wondering exactly how it differs from a credit card. Although you don’t hear about charge cards as often as credit cards, they’re still offered by a few financial institutions, and are generally intended for higher income earners with good credit.

If you fall under that category, getting a charge card can help if you're looking to avoid paying interest, need to spend a large amount, want to earn generous rewards, or give a boost to certain factors that make up your credit score. Most people, however, opt for credit cards rather than charge cards, as there is a much wider variety of credit cards intended for all types of income levels and credit scores.

Here, we’ll distinguish the differences between charge cards and credit cards to help you better weigh the options available to you.

What is a charge card?

A charge card is a spending card that needs to be paid off in full every month. Purchases are approved based on your credit and payment history. There is no interest rate or minimum due, but not paying the amount in full can result in significant fees and penalties.

As previously mentioned, only a few financial institutions offer charge cards nowadays for highly qualified borrowers. With that in mind, a secured credit card may be a better alternative if you are just getting started with either building or rebuilding your credit.

What’s the difference between a charge card and a credit card?

Charge cards and credit cards may look a lot alike, but there are a few key differences between the two.

Charge cards

• You must pay off the card in full each month.

• Not paying the balance in full each month results in late fees and penalties.

• The spend limit isn’t set when you open the card.

• Purchases are approved based on your credit and payment history

• You don’t pay interest on your charge card debt.

• There are sometimes annual fees, but many are waived for the first year.

• Many offer significant bonuses, perks, and rewards.

• Less availability, as fewer companies offer charge cards.

Credit cards

• You only have to make a minimum payment each month.

• There’s a set credit limit you can spend.

• You owe interest on any amount you don’t pay off each month.

• There’s usually an annual fee.

• Most issuers offer credit cards and rewards programs.

Should I get a charge card?

Deciding between a charge card and a credit card can be tricky, and is largely dependent on your spending habits and money management capabilities. Finding the right charge card with an annual fee you can manage can potentially give you more spending power when you need it, and rewards to boot.

It’s important to reiterate that charge cards aren’t available to everyone, especially if you don’t have good credit, and because there are limited card issuers that offer them, charge cards are a bit harder to find than credit cards. 

Whether you want to earn rewards or boost credit, both types of cards offer these capabilities, but only with responsible use. It’s important to do your due diligence in terms of researching and reviewing the terms of your agreement before opening any card. 

It’s also important to make sure that timely card payments fit into your overall budget. If you have a history of overspending, it’s probably not a good idea to open a charge card that won’t keep your spending in check with a limit. Likewise, if you are used to only paying the minimum balance due, then a credit card is probably more suited to your needs.

Explore the Varo Believe Card as an alternative

If you’re just getting started with building or rebuilding credit, a secured credit card could be a better route to take versus a charge card. The Varo Believe Card enables you to start building credit today, and comes with no minimum security deposit, no annual fee or interest, and no hard credit check to apply. 

Every purchase you make on a Varo Believe Card can help you build credit. Every time you make an on-time payment, you can build your credit history. By using your own money to start building credit responsibly, it helps you avoid falling into unmanageable debt.

Varo reports your payment history to the three major credit bureaus and displays your current credit score in your Varo app. Not to mention, you can rack up cashback from more than 50 brands when you shop online or in-store with your Varo Believe Card¹.

How do charge cards affect my credit?

Charge cards work a bit differently than credit cards when it comes to the effect on your credit score. Because charge cards don't generally have set spending limits, your credit utilization ratio, or how high of a balance you keep on a card versus your preset credit limit, isn't a factor like it is with credit cards.

Given that a large part of your credit score depends on your credit utilization ratio, a credit card works a bit faster than a charge card if you’re looking to boost your credit score.

Your payment history and length of credit history also make up large portions of your credit score. That’s why on-time payments can benefit you when it comes to using a charge card to build your credit.

No matter which one you choose, the issuer performs a hard credit inquiry. This means the lender will look at your credit report, which generally brings your credit score down a little bit.

As with a credit card, responsible bill payment is key when it comes to using a charge card as a tool to boost your credit score.

What are some other perks of charge cards?

In addition to being able to make larger purchases without interest, charge cards also offer extra perks that are important to consider. Like a credit card, you can get a charge card that offers travel or membership rewards, although these perks are usually more generous with a charge card. 

These perks can come as cash back, travel miles, or rewards points, which is why charge cards can be a good option for business travel. However, these added perks come at a cost, as charge cards will generally charge a higher annual fee than credit cards

Although charge cards aren’t as common as credit cards, they can work well for certain people  depending on their financial situation and spending habits. If you typically pay off your bill in full every month, you might not see much of a difference between the two outside of the spending limit and application requirements. At the end of the day, it’s important to do your research when it comes to finding the card that’s right for your spending habits, your budget, and your credit goals.