Charge card vs. credit card: what's the difference?

Charge cards and credit cards are both forms of cashless payments, but the way you pay them off is quite different. While credit cards allow you to carry a balance, charge cards must be paid in full every month.

Aside from how payment works, there are a few other differences to be aware of. In this article, we'll explain how credit cards and charge cards differ so that you can choose the right card for your business needs.

What is a charge card? 

A charge card is used for making purchases on credit, with the cardholder expected to pay off the entire balance at the end of the account’s billing cycle. Billing cycles are typically 30 days. Because you’re required to pay the card in full each month, a charge card encourages greater awareness of how and where your business is spending money. 

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Charge cards also come with expense management software and customizations that can help you manage employee spending. Unlike with credit cards, you can set custom controls like spending limits and merchant restrictions to enforce your company's expense policy. Plus, they'll automate your expense reports and offer budgeting and saving insights.‍

In terms of disadvantages, charge cards have more limited acceptance than credit cards. If your business is newly established and can't prove it has substantial annual revenue, with capital in the bank, you may not qualify.

Charge cards vs. credit cards: key differences

There are some key differences between charge cards and credit cards that you should be aware of. Let's review them one by one.

Payment terms

Although charge cards offer more flexible spending limits, credit cards have more flexible payment terms.

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No matter how much you spend with your credit card during a given billing cycle, you’re only required to make the minimum monthly payment on your total balance. This amount may represent a mere fraction of the outstanding balance for each billing cycle. Any unpaid balance that’s rolled over to the next month is charged according to your interest rate.

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Be warned, though: This feature makes it deceptively easy to rack up debt on your account. If this cycle is perpetuated over a long period, your business can accrue exorbitant interest on your balance, damaging your credit score in the process.

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In contrast, charge cards require you to pay your entire balance in full every month. Businesses with consistent cash flow that can shoulder the full expense may find this option to be a highly effective way to manage their budgets. 

Card limits

Credit cards put a cap on the amount of credit available to you each month. Once you reach your limit, you’re automatically restricted from making any new purchases on the account. Once you pay down some of that debt, then your credit increases again.

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When you’re approved for a card, the issuer determines your credit limit based on your credit score and payment history. If you'd like to raise your limit, you'll have to demonstrate a history of responsible and frequent card use.

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Meanwhile, charge cards don’t have preset card limits. Their spending limit fluctuates (sometimes even monthly) based on factors like:

• Credit history
• Monthly spending
• Liquid assets
• Historical sales
• Repayment habits

These flexible limits make charge cards especially useful for companies with consistent cash flow, or for those expecting to make many purchases in a short time period.

Eligibility requirements

Credit cards determine your eligibility based on your credit history. If you have a bad credit score, you'll still qualify for some cards, but they'll usually come with higher interest rates.

Charge cards, on the other hand, evaluate your application based on your company's revenue and amount of capital in the bank. So, if you don't have an established business credit history, you can still qualify—as long as your business is bringing in enough profit.

Impact on credit score

Credit utilization refers to how much of your available credit is used at any given time, and is expressed as a percentage. This factor accounts for a weighty 30% of your FICO credit score. 

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Since credit cards come with a preset limit, how much of that credit you use compared to your total available credit will impact your profile. Keeping your credit utilization down can help improve your credit score. It signals to creditors and credit bureaus that you can use your card, and pay it off, in a responsible manner. Conversely, a higher credit utilization ratio brings your credit score down.

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Charge cards generally don’t come with preset limits, so credit agencies don’t factor credit utilization rates into their scoring models. Because of this, making larger purchases with a charge card instead of a credit card can help improve your credit score instead of harming it.

Should I get a charge card or credit card?

If your business makes steady money every month, a charge card could work well since it requires paying off the full balance monthly. This can help keep spending in check. On the other hand, if money comes in more unevenly, a credit card might be better since you can carry a balance from month to month, providing some financial flexibility during tighter times.

Expense management is another factor to consider. Charge cards often come with tools that help track and control spending, making it easier to manage business expenses. Credit cards may also have expense management features, but they might not be as comprehensive. The right card can provide valuable insights into your spending, helping to streamline budgeting and financial planning in your business.

Lastly, consider the costs and rewards of each card type. Credit cards often have rewards programs, but they also come with annual fees and interest rates. Charge cards can also offer rewards—Ramp, for example, provides 1.5% unlimited cash back with no fees or interest.

Ramp’s charge card takes the complexity out of corporate finance

At Ramp, we offer corporate charge cards with no credit checks or personal guarantees, and unlimited 1.5% cash back on all purchases. In addition to physical cards, you can also set up virtual corporate cards for you and your employees.

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Combined with our powerful spend management platform, Ramp cards track and report your business expenses while identifying savings opportunities.

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Learn more about Ramp's corporate charge cards.