What is the difference between a charge card and a credit card
They may look identical, but charge cards and credit cards are surprisingly different financial tools. Both allow you to make a purchase without using cash, but the real difference is when the bill comes. With a credit card, you can carry a balance and pay it off over time, eventhough you will incur interest charges by doing so. With a charge card, the balance must be paid in full when the monthly statement arrives.
HOW DOES A CHARGE CARD WORK?
Unlike a credit card, a charge card doesn’t come with a pre-determined spending limit. This can make these cards more flexible and this can provide you with the buying power you may need month to month.
Just because you do not have a spending limit, does not mean that you have unlimited spending ability. If you’re planning on making a significant purchase, contact the charge card company to see if they’ll approve the amount you’d like to charge.
A credit card allows you much more flexibility. Even though credit cards have a set borrowing limit, you do not need to pay off the bill in full every month (although I recommend that you only charge what you can afford) you’re only required to make a minimum monthly payment on the total amount that you owe. While this can seem appealing, interest will add up over time, so it’s in your best interest to pay your credit card(s) off in full each month.
If you often need extra time to pay down your monthly bill, a credit card could be the better choice.
HOW A CREDIT CARD WORKS
A credit card, on the other hand, allows you to have a revolving balance that you can pay off over a period of time. The convenience of low minimum payments attracts consumers, and some find themselves getting quickly into credit card debt.
Some charge cards don’t have a predetermined credit limit, giving you a seemingly limitless amount of spending power. However, charge card issuers do have a soft spending limit for your charge card, which is based on what the credit card issuer thinks you can afford to repay each month according to your income, spending, and payment habits.
Credit cards, on the other hand, have a set credit limit that's established when you're approved for the credit card. The credit limit often stays the same, unless you're approved for a credit limit increase or your credit card issuer lowers your credit limit. You may receive penalties if you exceed your credit limit. For example, you’ll pay an over-the-limit fee and sometimes have your interest rate increased for exceeding the credit limit on your revolving credit card.
KEY DIFFERENCES BETWEEN A CHARGE CARD AND A CREDIT CARD
There are six key differences between charge cards and credit cards that you should be aware of.
Charge Cards
· Require full payment every month
· No hard spending limit
· Usually high annual fees
· No interest since must be paid in full
· Not as widely accepted
· Typically require very good credit
Credit Cards
· Allow a minimum payment each month
· Strict spending limit
· Low or no annual fees
· High interest rates if you don't pay in full
· Accepted by most sellers
· Some cards available to those with lower credit scores
THE BOTTOM LINE
If you are able to pay off your spending in full every month, have great credit you may consider a charge card. If you are likely to carry a balance and need the credit flexibility, a credit card might be a better choice.