Charge Card Vs. Credit Card: Which Should You Choose?

By Mark Di Vincenzo. May 7th 2016

Aren’t charge cards and credit cards one in the same? Nope. Many people use the terms interchangeably, but they are very different despite the fact that they look exactly the same and they both allow you to buy things without cash.

Perhaps the biggest difference between the two is that charge cards don’t have credit limits, but credit cards do.

Other Differences

  • Credit cards allow you to spread your payments out over months -- or even years -- as long as you make the minimum payment. The balance on a charge card must be paid in full every month.
  • Charge credits come with an annual fee, while most credit cards don’t.
  • One company, American Express, dominates the charge card market, while many, many different companies issue credit cards.

There are plenty of advantages and disadvantages to both types of cards. We’ll highlight the pros and cons, starting with charge cards.

Charge Cards

Pros

  • Charge cards have no limits. Technically, they come with something called a “shadow limit” – the upper boundary of what the issuer thinks you can afford. Some might see this as a bad thing, but it is good to know that someone has got your back when it comes to spending.
  • Charge card users who follow the rules won’t pay interest on their purchases and won’t accumulate debt. They will pay as they go.
  • Charge card users might be able to qualify for a charge card with a slightly lower credit score since the card issuers consider them slightly less risky than credit cards, which can put users in long-term debt and even lead to default.
  • Charge card reward programs tend to be very generous.
  • Charge cards are more likely than credit cards to offer free insurance on purchases and travel expenses, and are more likely to provide detailed expense records as well as records that show spending by category – a feature business owners like.
  • Some people consider charge cards prestigious and like that the cards cause others to think they are wealthy and financially responsible.

Cons

  • There is no grace period with a charge card. If the balance is not paid in full each month, you can’t use your card until you do. For those who don’t pay in full, most charge cards charge a penalty as high as 3 percent of your balance which may be several hundred dollars.
  • Charge cards come with annual fees of $95 to $450, though some charge no fees for the first year.
  • Users can't stretch out payments, which some may consider a good thing.

Credit Cards

Pros

  • There is a great selection of credit cards, some of which offer users cash back and discounts on gas, travel and other purchases. (To learn more about rewards credit cards, see 6 Of The Best Cash Back Reward Credit Cards and The Best Gas Reward Credit Cards.)
  • Lots of credit cards charge no annual fee. (They make plenty of money on interest.) But some credit card issuers do charge a fee to those who rarely use their cards.
  • With credit cards you can pay off your balances each month in full or you can make payments over a longer period of time. This gives business owners and other users the flexibility to float purchases.
  • The formula used to determine credit scores depends more on credit card usage than on charge card usage. So those who use their credit cards responsibly have a greater opportunity to boost their credit scores.

Cons

  • Credit card users must pay interest charges if they don’t pay their balance in full each month.
  • Credit cards have spending limits that prohibit users from spending over a certain amount, which can be good or bad, depending on how you look at it. Those limits can be as low as a few hundred dollars for “low-end” cards and $30,000 or more for “high-end” cards.
  • Interest rates for credit cards also have limits, but they are high compared with interest rates for car loans and home mortgages. Credit card interest rates range from 10 percent to 15 percent for most people and as high as 24.96 percent for those with bad credit. (To learn about credit cards for people with bad credit, see The 6 Best Credit Cards For Bad Credit.)
  • Undisciplined spenders who consider credit cards part of their income can go into serious debt in a relatively short period of time, damaging their credit scores and costing them a lot of money to borrow money. These people may have to resort payday and title loans and other “predatory” lenders that charge very high interest rates. (To learn more about predatory lending, see 5 Different Types Of Loans You Should Never Get.)

The bottom line is that credit cards and charge cards have a lot going for them, but there are financial risks associated with both of them. Understand the benefits and the risks before you decide which one is right for you.

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