What Is a Charge Card and How Does It Work?

A charge card serves as a payment tool allowing users to make purchases. It functions as a short-term credit facility, requiring prompt and complete repayment. This distinguishes it from other common payment methods.

Core Characteristics of a Charge Card

A primary feature of a charge card is the absence of a pre-set spending limit, which provides cardholders with flexible purchasing power. This does not imply unlimited spending; transaction approvals are based on payment history, financial resources, and spending patterns. Charge cards mandate that the entire outstanding balance must be paid in full by the due date of each billing cycle.

This strict repayment requirement means that charge cards typically do not charge interest on purchases. Interest accrual is avoided because balances are not carried over from one month to the next.

How Charge Cards Function

Using a charge card involves a billing cycle where a statement detailing all transactions is issued monthly. Cardholders must pay the full amount by the specified due date. Payments can be made through online portals, mail, or phone.

Failing to pay the full balance by the due date can lead to significant consequences. Late fees are commonly assessed, which can range from a fixed amount, such as $40, or a percentage of the unpaid balance. Non-payment can also result in account suspension or closure, rendering the card unusable.

Missed payments are often reported to credit bureaus, negatively impacting the cardholder’s credit score. Many charge cards also offer benefits like rewards programs, including points or miles, and travel perks such as airport lounge access or travel insurance.

Charge Cards Versus Other Payment Cards

Charge cards differ significantly from credit cards, primarily in their repayment structure and spending limits. Credit cards are revolving credit instruments, allowing cardholders to carry a balance from month to month by making a minimum payment, though this accrues interest on the unpaid amount. In contrast, charge cards demand that the entire balance be settled each month, meaning no interest is charged on purchases, provided timely full payment is made. Credit cards also come with a pre-set credit limit, whereas charge cards generally do not have a fixed limit, with spending power determined by the issuer based on the cardholder’s financial behavior.

Comparing charge cards to debit cards reveals even more fundamental differences. A debit card draws funds directly from the cardholder’s linked bank account, meaning transactions are limited to the available balance and funds are deducted immediately. Charge cards, conversely, extend short-term credit, allowing purchases to be made against a line of credit rather than directly from a bank account. Unlike charge cards, debit card usage typically does not impact a credit score because it does not involve borrowing money.