Credit Card vs. Charge Card

September 7, 2011 No Comments »
Credit Card vs. Charge Card

In the credit card world, the terms “credit card” and “charge card” get thrown around a lot, and sometimes interchangeably.

But while they share some core characteristics, they are actually quite a bit different.

So let’s take a look at the similarities and differences of the two pieces of plastic to better understand what purpose they serve and why.

Credit Cards

Put simply, a credit card, or more specifically, a revolving credit card, allows you to charge purchases using a fixed line of credit. You make purchases now and pay later.

After each billing cycle (typically a month), you will be given several payment options to pay off the charges.

You can make the minimum payment, an amount of your choice, or pay off the entire bill.

Either way, you must make at least the minimum payment within your credit card grace period to avoid penalty APR or a late fee.

This “payment freedom” is essentially what distinguishes a credit card from a charge card.

You have choices, and can carry a balance if you need/want to. Just know that if you do, you will pay interest in the way of credit card finance charges.

Charge Cards

A charge card looks exactly like a standard credit card and works quite the same, allowing you to make purchases now and pay later.

But there are a few key differences. Perhaps the biggest and most important is that your entire balance must be paid off in full each and every billing cycle.

So if you charge $1,000 on your charge card in any given month, your required payment will be $1,000.

You won’t have the option of making a minimum payment or some other amount. It must be paid in full!

The bright side to this seemingly harsh rule is that charge cards don’t have a credit limit, at least not a pre-set one, so you can charge as much as you’d like each month, assuming the credit card issuer is comfortable with your spending habits.

Keep in mind that they’ll monitor your spending and determine how much you can spend without an explicit limit.

So why would someone choose a charge card over a credit card?

Well, charge cards are great for people who don’t want to rack up debt, but desire the added cash flow, convenience, and security of using a credit card.

In other words, they get the ease of use and safety of a credit card, but don’t run into possible debt problems down the line thanks to that aforementioned payment freedom.

Additionally, many charge cards offer great rewards just like standard credit cards, so someone running a business can use their charge card to manage their day-to-day expenses, and earn cash back in the process.

The American Express Plum Card and Chase Ink are two such popular business charge cards.

However, the big downside to charge cards is that most (if not all) carry an annual fee. After all, the credit card issuers aren’t making any money off interest, so they need to make sure they turn a profit.

In summary, if you feel you won’t be able to control your spending, but still don’t want to use cash, a charge card may be the better choice to help keep you disciplined.

Just know that if you do spend beyond your means, the entire balance will be due each month, which could land you in hot water if you can’t pay up.

Standard credit cards are more forgiving, though they come at the price of your interest rate. But there are many great options with no annual fee, so if you can live within your means, they’re probably the better choice.

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