Credit Cards and Charge Cards Compared

While the issuers of credit cards and charge cards both are lending money to cardholders, there are advantages and disadvantages to each. Which is right for you will depend on your use of credit cards or charge cards; your financial habits and goals; and your financial standing. The following information examines the how credit cards and charge cards work and the upsides and downsides of both.

Credit Cards and Charge Cards

The terms credit cards and charge cards often are used interchangeably. But in fact, they are similar but different borrowing tools. With a credit card, you are approved to borrow up to a certain amount of money with the card by using it at almost any place of business. Depending on the strength of your application - your credit score, financial standing and financial history - you will be offered a specific interest rate. Some, but by no means al, credit cards have monthly fees for their use. Most offer some kind of rewards program such as airline miles or cash back. At the end of each month, you owe a calculated minimum payment on the credit card. If your payment is less than the full balance, the balance rolls over and you are charged interest on that amount which will show up as part of your next month’s balance. Late payments result in fees and higher interest rates.

Charge cards are a subset of the credit card industry, although for many years it was the more widely used of the two. It has dropped in popularity - and in the number of stores that accept them - as credit has become a more accepted part of the American lifestyle. Charge cards, like credit cards, come with a specific borrowing limit. Also like credit cards, charge cards let you make purchases at many businesses without actually having the money available at the time of purchase. However, unlike credit cards, your balance does not roll over. The balance on a charge card is due in full at the end of each month.

Credit Card Pros

Flexibility and ease of use are the primary “pros” of a credit card. They are easy to qualify for. Even with bad credit you can often get a low-limit credit card and begin to repair credit with it. Although not always the case, credit cards are now accepted almost everywhere. Credit cards essentially create a line of credit that, if managed well by you, allow you to afford a variety of goods and services that might not be supported in the short term by your income. Of course, the money is borrowed and must be paid back, but because the balance rolls over, you can pay over time for needed purchases now. 

Credit Card Cons

Among the “cons” of the credit card? Interest rates typically are high and get much higher if you fall behind. Because they are easy to use they also are easy to misuse. Because a credit card issuer approves you for a given credit limit, doesn’t mean you can manage payments on it. Credit cards need to be used with discipline or they can negatively impact your credit score.

Charge Card Pros

Because charge cards unlike credit cards must be paid off in full each month, it is harder to fall behind on your payment. You cannot slowly build up a large debt that will be difficult to repay. Generally, charge cards have better rewards programs as well - some as much as 5 percent cash back - because you pose far less risk to the lender. 

Credit Card Cons

But on the “con” side, charge cards are much harder to get than credit cards. You must be able to demonstrate that you can pay off the full amount, which requires greater financial liquidity on your part. And, finally, charge cards do not give you the same flexibility as a credit card to manage your expenses with your cash flow.

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