Certain credit cards, often known as charge cards, require you to pay your balance in full every month. American Express and Diner's Club are traditionally two big issuers of these types of cards. Even if your card doesn't have such a requirement, it can still be a good idea – if you can afford it – to pay in full to avoid paying interest charges.
Charge Cards and Credit Cards
Charge cards and credit cards work more or less the same when you're in a store or restaurant. But when you get your monthly bill, credit cards typically allow you to pay a minimum portion of your balance and roll the rest over onto your next monthly bill with interest. Charge cards insist you pay in full by the due date.
For that reason, charge cards don't have interest rates associated with them, since they're not in the business of lending money at interest, though they may charge hefty late fees if you fail to pay on time. They also often don't have fixed spending limits, though in practice they may cap your spending based on your perceived ability to pay.
Charge cards can also count differently toward your credit rating and report than credit cards, since without a fixed spending limit your credit utilization, meaning the fraction of your limit you actually spend, can't be computed in the same way as with a credit card. The card company will generally still report whether or not you pay your bill on time each month, however.
Charge cards essentially always charge an annual fee, while only some credit cards do so. Both can also provide rewards programs that give you cash back, travel perks like frequent flyer miles or other incentives to spend money on that particular card.
Paying Your Balance in Full
Even if you're using a credit card and not a charge card, which means you have the option to only pay part of your balance, it can be a good idea to pay it in full if you can afford it.
That's because credit card interest can add up quickly, effectively making whatever you purchased with your card that much more expensive. If you do plan to pay off your balance over time, it can be a good idea to shop around for a card with a low interest rate.
Paying off your balance in full, or at least keeping it low, can also help to improve your credit rating by minimizing your card utilization.
- MyFICO: Credit Report Q and A
- American Express: Compare Cards: 4 Cards Found
- Diner's Club International: The Story Behind the Card
- Discover: What Is a Charge Card?
- American Express: Choosing the Best American Express Charge Card for You
- BankRate: Is a Charge Card Better Than a Credit Card?
- Experian: Will Paying My Credit Card Balance Every Month Help My Credit Score?
- Experian. "Is a Charge Card Different From a Credit Card?" Accessed April 13, 2020.
- Federal Register. "Truth in Lending (Regulation Z) Annual Threshold Adjustments (Credit Cards, HOEPA, and Qualified Mortgages)." Accessed April 13, 2020.
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.