The Difference Between a Charge Card and Credit Card
If you've heard the term "charge card" and thought it referred to a credit card, it's understandable because the terms are often used interchangeably. However, a charge card is a completely different product that, unlike a credit card, does not have a credit line or charge interest. Here's a closer look at the difference between the two terms.
What is a charge card?
Charge cards are becoming increasingly rare, but they offer some advantages - and disadvantages - compared to credit cards:
- There's no spending limit, meaning you don't have to worry about your card being declined. This can be an advantage, of course, if you need to make large purchases on a regular basis, which is why this card is popular with business owners or the self-employed.
- You must pay off your balance each month or you will be charged large late fees. If you pay too many late fees, your card may be suspended or closed.
- No interest will be charged. The flip side of having to pay off your credit card balance each month is that you don't have a long-term debt and you don't have to pay interest, as is the case with credit cards. This is good for avoiding a lot of debt, but you lose some flexibility if you pay off a major purchase over several months instead of just four weeks.
- High annual fees: Since lenders can't make money on interest payments with charge cards, they make up for that lost revenue with annual fees that can cost hundreds of dollars. In contrast, many credit cards don't charge an annual fee at all, so you're really only paying for the higher credit line on larger purchases.
Should you use a charge card?
That depends on whether you make five-figure purchases on a regular basis, as most credit cards already offer a fairly high credit line to most borrowers. You'll also need a reliable cash flow to ensure you can pay for those purchases each month (another reason charge cards are well-suited for small business owners).
If you already pay your monthly bill every fall and want the benefits of unlimited spending, a charge card might be a good option for you. For an overview of some of the best charge cards available.
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