A card is a card, right? Just a piece of plastic that you use, a convenient payment method which has been used for years and years. It is so easy to take your card and pay for what you have just bought without thinking about the type of card you are using.
However, if you take this approach, you will see your budget drop significantly without an apparent reason. But as it usually happens, the true reason is just before our eyes. In this case, it has to do with using your cards in the wrong way.
Take a credit and debit card, for example. If you use your credit card for purchases that should be made with a debit card, you will repent much sooner than you think.
Therefore, to make better financial decisions, you need to know the difference between different types of cards you already have or plan to get in the near future.
In this article, we are going to explain the most important differences between a charge and credit card. Read on to find out what the differences are and how you can use each of the cards.
What Are Charge Cards?
Charge cards enable consumers to purchase products and services and pay for them later on. This is where they don’t differ from credit cards. However, the difference lies in the fact that people who have these cards have to pay back the entire amount of money that they borrow every month on the due date. If, for some reason, you are unable to pay this amount, you can be charged a high fee or even lose your charge card.
What is characteristic of charge cards is the fact that they don’t have a preset spending limit. In other words, you can spend as much money as you want when using this card. This is one of the reasons why charge cards have an annual fee which ranges from around $100 to as much as $450.
Moreover, the U.S. residents can apply for a charge card only with American Express, which is a huge drawback. At this company, there are only four cards available at the moment: Green Card, Gold Card, Premier Rewards Gold Card, and Platinum Card.
Advantages of a Charge Cards
You don’t need to have the money on hand in order to make a purchase with this card. In addition, there is no risk of carrying the balance that will charge you interest. This means that there is less chance of getting into debt when using this card.
These cards often have cash back bonuses and air miles bonus programs that are superior to those of credit cards. They also offer many other benefits such as free roadside assistance, free hotel room upgrades and free food at airports.
Finally, charge cards can help you improve your credit as much as credit cards, and they also offer strong consumer protection.
What Are Credit Cards?
Credit cards enable cardholders to buy things ‘on credit’. This means that they don’t have to pay for the product or service until their credit card bill is due. It’s as if you received a small loan to make a purchase.
What differentiates this type of card from the charge card is its payment flexibility. When you use this card, you don’t have to pay back the entire amount spent on the card every month. Instead, you can choose either to pay a minimum amount (determined by the card issuer) or any other amount.
However, if you fail to pay the full balance, you need to pay APRs (Annual Percentage Rates) on the remaining balance. You have the choice to repay this balance at once or divide it and pay it over time (carry the balance). As we already mentioned, if you choose the latter, you will have to pay additional fees.
These benefits, however, do come with both the good and the bad. For example, you can get rewards (cash back, points, air miles, etc.) based on how much money you spend using your credit card. But to enjoy these benefits, you might have to pay annual fees.
Advantages of a Credit Cards
The best feature of a credit card is definitely its flexibility. You practically have an indefinite amount of time to pay back the money keeping in mind that you do need to pay at least the minimum amount each month.
Reward programs offered by credit card companies in the form of gift certificates or rewards programs can be very useful from time to time. Moreover, these cards can help you build a good credit report, which will be rather useful in various situations. Consumer protection is another thing that credit card companies take pride in since they often help people deal with fraudulent purchases and lost card issues.
When to Use a Charge Card?
If you can pay off your entire credit balance each month, then by all means use a charge card. Even though they are more expensive, charged cards offer more benefits like no preset spending limit.
Another great advantage is access to American Express’s membership rewards program, which allows you to make big purchases without the risk of hitting the same limit for two months in a row. Charge card companies work with consumers to enable them to make purchases that, according to banks, can be paid back.
If you are not a highly disciplined person, then a charge card is the right choice for you. Since the amount on it has to be paid off in full every month in order to avoid penalty fees, you will feel somewhat obligated to pay back the money. In addition, you will start buying only the things that you really need because you will pay a high fee in case you carry the balance.
Credit cards lead some people to make bad financial decisions and postpone their payments while charge cards train customers to be more financially responsible precisely because they charge high fees. However, if you still carry the balance on a charge card, you will pay a much higher penalty fee than with a credit card.
Finally, charge cards require that you have good or excellent credit ‒ at least 690, which means that not everyone can afford to use a charge card.
When to Use a Credit Card?
In case you want certain flexibility when it comes to paying off your balance, opt for a credit card. Credit cards allow you to choose how much of your balance you pay each month, give you a better understanding of how much you can spend as well as offer a wide variety of credit cards and rewards programs.
You can pay off the minimum and pay the interest on the remaining balance. APRs for credit cards are lower than those on charge cards, which can save you a lot of money in the long run. Also, the spending limit on these cards is predetermined upon the approval of the card. If you try to exceed this limit, the purchase will be denied.
Credit cards come in a much greater variety than charge cards. They can come with no annual fees (basic cards) to premium cards that require a certain fee. Also, credit cards give attractive bonuses, rewards, air miles, cash back and many more perks.
While charge cards require good credit, you can get approved for a credit card even if your score is not that high. So, if you need a card and have a fair credit score or below, then credit cards are for you.
There are many options to choose from if you don’t have enough cash at the moment of a big purchase. Credit, charge or even debit cards can come in handy in various situations. What is important to know is the features that each of these payment methods offers.
While charge cards require that you pay off your balance in full every month, they instill greater discipline in the customers who use them. On the other hand, credit cards allow for more payment flexibility. Both types of cards offer great reward programs that you can enjoy if you use them wisely.
Therefore, decide what you need money for, assess your financial habits (be honest) and you will know which card to choose. If you opt for a credit card, make sure to shop around and compare offers from different credit card companies. This way, you will be able to get the card that works best for you.