The differences between charge cards and credit cards explained

Cash use is falling dramatically in the UK as more and more of us prefer the convenience of using plastic over notes and coins. But whether you choose to pay with a charge card or a credit card will depend on your individual needs and circumstances.

The key difference between a charge card and a credit card is that, with a charge card, you have to pay the balance in full every month. Charge cards don’t offer credit but there is no spending limit or interest charged as long as you repay what you’ve borrowed in full and on time.

By contrast, credit cards have a set credit limit and interest will be applied each month to the balance which remains. Some credit cards come with a 0% interest offer but this is usually only for a limited time and will only apply to purchases with interest kicking in after the initial period.

Who is a charge card best for?

American Express is the best-known provider of charge cards in the world. A lot of businesses use charge cards and to be eligible for a personal charge card, you usually have to earn over a certain amount and have a good credit rating.

Charge cards are ideal for people who don’t want to pay interest every month and they are very convenient for those who spend a large amount or anyone who has to make an expensive purchase which may have gone on their credit card.

Charge cards often come with many attractive perks such as discount and reward schemes. The more exclusive charge cards offer extras like concierge services, travel insurance and access to airport VIP lounges.

A charge card will usually come with an annual fee, but often the value of the perks on offer will offset this. If you don’t repay the bill in full though you will be hit with charges and interest added to the amount due. Paying late could also impact your credit score and the card could be cancelled.

Who is a credit card best for?

Charge cards are not suitable for borrowing money for longer than a month, because the balance must be paid in full at the end of the month. A credit card is suitable for lending over a longer period and could be a better option if you simply don’t have enough cash to repay the balance within a single month.

Each month, you will have to repay a minimum of one percent of the credit card balance. Credit cards offer cash advances enabling you to withdraw money out of an ATM. Beware though, as usually the charges for this are quite high and it can be an expensive way of borrowing cash.

Credit cards are available in the UK for everything from bad to excellent credit scores which makes them much more accessible than charge cards. Fees, interest rates, credit limits, and rewards vary markedly depending on the credit history of the applicant.

This means that the best rates are only available to those with good credit scores or who meet minimum income requirements. The credit card provider will set a credit limit based on their own assessment of the customer’s financial history and risk profile.

There are lots of credit card providers out there meaning the range of product features and perks available, offer a much greater choice than for charge cards. Some credit cards come with a range of benefits such as cashback on purchases and points which can be converted into vouchers for spending at shops, hotels, and airlines.

Other key differences between charge cards and credit cards

Another key difference to consider between a charge card and a credit card is the protection afforded to credit card purchases under UK legislation. Credit card spending is protected by Section 75 of the Consumer Credit Act. The card issuer is held just as liable as the retailer if the goods are faulty or the retailer goes out of business. The consumer is entitled to claim a refund from the credit card provider on purchases made between £100 and £60,260.

Charge cards are not protected by the same legislation but the big providers have their own protection schemes. American Express, Visa and Mastercard enable customers to claim for a refund if something goes wrong within 120 days of the purchase being made.

Both credit cards and charge cards can impact your credit score but also help you build it. When you apply for a charge card, the issuer will usually run a ‘hard’ credit check which will stay on your file for two years. The impact of this on your credit score is usually minor, however.

Use of a credit card can have a much greater impact on someone’s credit rating. The amount of credit you have remaining on the card is a significant factor in how the credit reference agencies assess your creditworthiness. A lower balance compared with your credit limit is considered by creditors to be a positive as it demonstrates you can use the credit card responsibly without relying too heavily on it. As charge cards don’t come with a present spending limit, it isn’t possible to determine how your usage has impacted on your apparent creditworthiness.