I once wrote an extremely brief article on the difference between a charge card and a credit card. However, that article doesn’t completely answer the question because I still have conversations and receive emails where people use the terms “charge card” and “credit card” interchangeably.
Then I realized that it was worthwhile to differentiate between all three cards by listing their advantages and disadvantages. So let’s go through them one by one.
Credit
Credit cards are borrowed money. When a company issues a credit card to you, you’re given a specific line of credit – the maximum amount you can borrow from the company. Each time you use the card, you borrow some money from that company, and you have to pay part of that amount back to the company every month. Mastercard, Visa and Discover are the major credit cards.
Advantages of credit cards
The biggest advantage of credit cards is flexibility; You can make purchases without actually having cash at the moment. You also have an indefinite period of time to pay that amount back, although you must make a minimum payment each month for the amount you owe.
Many credit cards also have rewards and benefits programs, offering everything from 2% cash back on all purchases to rental car insurance when you travel. Consumer protection with credit cards is often quite strong; they will often help you deal with fraudulent purchases and not leave you dry if you lose your card.
Plus, using a good credit card will help you build a good credit report, save you money on insurance, and get you loans in the future.
Cons of credit cards
The big downside is that all flexibility is a double-edged sword. The ease of using credit cards and the lack of pressure to pay off what you owe makes it very easy to make poor purchasing decisions. Then, when you can’t pay off the card in full, you usually pay heavy interest on that unpaid amount.
In the long run, that gain can be incredibly costly.
Debit card
The debit card is linked to your checking or savings account. Each time you use the card, money is automatically drawn from your checking or savings account to pay for purchases.
Advantages of debit card
You can’t get into debt with a debit card, as it doesn’t allow you to spend more than you have in your account. This is a huge advantage for people who are struggling with debt because it helps them not to overspend.
Plus, debit cards are versatile and convenient for everyday purchases. You also don’t have to have good credit to have a debit card; you usually get one in your checking account.
Disadvantages of Debit Card
The biggest downside is that you have to keep a very close eye on your account balance because you can overdraft your account if you’re not careful. Debit cards often don’t have the same consumer protections as credit and charge cards – if your card is stolen, protection against unauthorized purchases may be weak.
Another disadvantage is that very few debit cards have a rewards program of any kind.
Charge card
Charge cards are often confused with credit cards, but they work in a rather different fashion. Like a credit card, a charge card extends your credit to you from the issuer. However, you must pay the full balance at the end of the month.
Some premium cards also have an annual membership fee. Charge cards are often associated with American Express; many chain stores also often issue their own charge card, which can only be used at that store.
Advantages of charge cards
You don’t need to have cash on hand to make purchases with a charge card, and there’s no risk of carrying a balance that will charge interest.
Many charge cards have huge rewards programs from things like 5% cashback to free airline companion flights – their rewards programs are often better than card rewards programs Credit. Charge cards often come with additional services and benefits, like free roadside assistance, free food at the airport, and free hotel room upgrades.
They help your credit as much as credit cards. Most charge cards also offer strong consumer protection, similar to credit cards.
Disadvantages of charge cards
Some premium cards have an annual fee that takes away the benefits of using them. In addition, since you are operating on credit, there is some risk that you may accumulate a large balance on the card that is difficult to pay off.
Many charge cards are often quite strict about who they are issued to; You need to have good credit before getting one.
Which one is right for you?
Many people want to avoid credit at all costs because of the risk of going into debt. In that case, a debit card is clearly the right choice. If you see a great debit card (preferably one with some pictures of the rewards program), you should investigate all the check options available at your local bank – and possibly buy one. Shop around for a new bank, especially if you’re not satisfied with your current bank.
Everyone should apply for at least one credit card and use it infrequently. It provides a very easy way to build a positive credit report and gives you flexibility in purchasing. If you have a good rewards card, you can also earn cashback and other benefits.
If you have good credit, pay back the full balance each month on your credit card, and travel a bit, it’s a good idea to check out some of the charge cards on offer – especially if you’re running a business. Small Business. Usually, you can get big net benefits from a good charge card, but you have to educate yourself about those benefits.
Overall, if you’ve never owned a card, it’s smart to get a good checking account and use their debit card for most purchases. Also, it’s wise to get a credit card and only use it for a few purchases. This allows you to start building healthy credit without the risk of credit card debt.
[This article was first published on The Simple Dollar in 2020. It was updated in March 2022.]
