One of the confusions that come up when many people use plastic is the difference between a credit card and a charge card.
In some cases, they are basically used as the same thing, especially since there are very few true charge cards in use these days. Most people swipe credit cards instead of charge cards.
Difference Between a Credit Card and a Charge Card
What is a Charge Card?
Most people are familiar with the credit card.
You borrow money from the issuer throughout the month. You have a credit limit, so you can’t borrow more than a set amount. At the end of the month, when the bill is sent to you, you have a choice: You can pay off the balance in full, or you can carry a portion of the balance on to the next month. If you pay off the balance, then you don’t pay interest. On the other hand, if you carry a balance, then you are charged an interest fee to finance your purchases for another month.
A charge card is different from a credit card in that it doesn’t allow for you to carry a balance. At the end of the month, you are expected to pay off everything that you have charged to the card. As a result, you don’t have to pay interest, and you don’t usually have a credit limit. You just pay off the card.
As a result, it’s common to pay an annual fee with a charge card. The issuer can’t make money on interest, so it charges an annual fee. Many charge cards also have rewards programs. Often, the rewards programs are fairly generous. You are paying an annual fee, and the issuer does make money from transaction fees paid by merchants when the card is swiped.
For many a charge card is great because it forces you to pay your balance off every month*. Knowing you have to pay your balance off makes you more aware of what you are spending on the card.
For other people a charge card is a dangerous thing because the credit limit isn’t defined. They think it’s OK to charge what they want without thinking ahead to the consequences at the end of the month.
[*You don’t always have to pay your balance off. Some cards may allow you to carry balances over but expect to pay steeper interest fees than you would with a credit card. Other times you will be hit with steep fines and interest and the card company may close your account if you don’t pay off your balance.]
Why Credit Cards are Far More Common
The history of credit cards has its base in charge cards.
Charge cards made it easy to make purchases without needing to carry a lot of cash. The account was settled at the end of the month, and consumers didn’t worry much about financing.
However, over time, credit cards became the norm.
Credit cards are even more convenient for consumers. With a charge card, you still have to be careful to avoid spending more than you can afford. You know you are going to have to pay off the entire amount each month.
However, with a credit card, you can carry the balance to another month, as long as you are willing to pay the interest charge.
As a result, consumers can buy things they can’t technically afford without having to worry about the bill coming due in full at the end of the month. As long as a minimum payment can be need, a credit card balance can be carried indefinitely. It’s attractive to consumers, and issuers like it, too, since they can keep making money off the same balance month after month.
Savvy credit card use functions a lot like a charge card. Even though you don’t have to pay off the whole balance, it’s smart to avoid carrying what you owe month to month. Treat your credit card like a charge card, and you will better avoid debt.