Charge card vs. credit card: Understanding the differences

While most Canadians are familiar with the term “credit card,” the term “charge card” is much less common. However, the two have several things in common and are important financial tools that can serve distinct purposes for individuals with different financial needs and habits. Understanding the differences between a charge card vs credit card is crucial for making informed decisions about which type of card is best for you.

What is a charge card?

A charge card is a type of payment card that requires you to pay the full balance each month. This is different from a credit card, on which you can carry a balance for an extended period of time and can even just make minimum payments each month.

Unlike with a credit card, you are not loaned funds for longer than a one-month increment, since you must pay off the borrowed funds each month. In essence, a charge card issuer is not looking to lend you money over an extended period of time and reap profits via the interest they charge. Rather, charge card companies generally make a profit through annual fees and the merchant fees they charge the stores for processing your purchase.

How does a charge card work?

With a charge card, there’s no such thing as a minimum required payment — you must pay off the amount owing in full each month. If you don't pay off the full balance, you’ll be charged a high rate of interest (a minimum of 30%, which is higher than the interest charged by credit card companies, which generally hovers around 20%) as well as late fees, and your account may be closed. Interestingly, because you are expected to pay the full amount owing off each month, charge cards also don’t come with pre-set spending limits. The golden rule is that you can charge pretty much what you want to the card as long as you can pay it off each month.

Aside from not having a spending limit and being required to pay off the balance in full each month, charge cards work like credit cards. When you make a purchase, you can use your charge card to pay for the items or services just as you would a credit card. Likewise, you’ll be sent a statement, monthly. The application process is also similar. You’ll provide some personal info and the company will usually perform a credit check and a review of your financial situation. Once approved, you use your charge card to make purchases at the same merchants who accept credit cards, including online transactions, in-store purchases and paying for services.

How a credit card works

With a credit card, you have a pre-set limit that establishes how much you can charge to the card. That’s because the credit card provider is essentially agreeing to lend you up to your limit amount for an indefinite period of time and in return, you agree to pay back the borrowed amount (or at the very least a minimum monthly amount), plus interest and any applicable fees. As with a charge card, you can use the credit card to make purchases and pay for services. Additionally, you can even get cash advances or transfer a balance from a different credit card, up to your approved credit limit (which you can’t with a charge card).

While you’re not expected to pay off your total balance each month, you’re required to make a minimum monthly payment or you’ll be charged late fees. You can choose to pay the minimum payment, the full balance, or any amount in between. If you don't pay the full balance, interest will be charged on the remaining amount, and you'll need to make regular payments to avoid late fees and negative impacts on your credit score.

Is a charge card harder to get than a credit card?

A charge card is generally harder to get than a credit card in Canada. Because the charge card provider has to be certain that the cardholder will pay off their full balance each month, charge cards are typically issued to individuals with excellent credit history and a high income. Credit cards are more accessible and come in various forms tailored to different credit profiles. Some credit card providers will even approve cards for people with a weak credit history or who have a low income.

How can I get a charge card?

Presently in Canada, the only way to get a charge card is via American Express and there is only one type available — the American Express Aeroplan card. This card offers a range of benefits, including earning Aeroplan points on eligible purchases, access to benefits like an impressive array of travel insurance, complimentary checked baggage for you and up to eight other fellow travellers on the same flight and exclusive American Express experiences.

What is a charge card vs credit card?

Here are some of the key differences between a charge card and credit card:

• Spending limits: A charge card does not have a pre-set spending limit, while a credit card does
• Payment requirements: You must pay the full balance of a charge card each month, whereas a credit card allows you to carry a balance and charges you interest on any balance that is owed
• Fees: Both types of cards can have fees, but charge cards often have higher fees for late payments and may have annual fees
• Application process: A charge card is harder to successfully apply for than a credit card cause you’ll need a high income and a strong credit score

Charge cards vs. credit cards: Effects on your credit

Both charge cards and credit cards can impact your credit score because most card providers will report any late or non-payments to Canada’s credit bureaus. That being said, while missed payment will negatively affect your credit file (and cause a drop in your score), because you don’t have a pre-set spending limit with a charge card, it won’t affect your credit utilization ratio.

Furthermore, because charge cards require full payment each month, they can help you avoid debt and maintain a good credit score. Credit cards, if not managed properly, can lead to high-interest debt and negatively affect your credit score.

Should I get a credit card or a charge card?

Whether or not you should get a credit card or charge card will come down to your own individual preferences, credit profile and spending habits. If you're disciplined about your spending and can pay your balance in full each month, a charge card might be a good choice because it gives you greater flexibility without the risk of accumulating interest charges and high-interest debt. On the other hand, if you need the flexibility to carry a balance or prefer the option to pay only the minimum payment, a credit card might better align with your spending habits.