Those plastic (or metal) cards we use to pay come in many forms. Most people are familiar with debit cards, which draw funds directly from your bank account every time you pay.
The other option - which comes with more protections and the opportunity to earn rewards - is to buy with credit using a charge card or a credit card. While they look and work similarly, there is a key difference that could be a big deal to you when it's time to pay.
Keep in mind that we're focusing on the rewards and perks that make these credit cards great options, not things like interest rates and late fees, which will far outweigh the value of any points or miles. It's important to practice financial discipline when using credit cards by paying your balances in full each month, making payments on time, and only spending what you can afford to pay back.
What is a charge card?
A charge card is a type of card that allows you to buy on credit, but only for a limited time. With a charge card, your entire balance is due in full every statement period, typically monthly. That means you won't pay interest on your purchases, but you have a strict payment deadline to follow.
If you don't pay the balance off as agreed, you could wind up with expensive late fees. If you plan to carry a balance from month to month and pay it down over time, charge cards are not for you. Because they are expected to be paid back in full every month, they often have no preset spending limit.
This type of card used to be quite popular, but over time fewer and fewer issuers offer charge cards. American Express and some stores still offer the ability to open a new charge card account.
The American Express Platinum and the American Express® Gold Card are some of the very few options remaining in the charge card category. However, both cards also offer excellent rewards and benefits, which makes them a great choice for people with good to excellent credit scores who don't plan on carrying a balance. For small-business owners, the Business Platinum® Card from American Express is a charge card worth considering.
What is a credit card?
Credit cards work just like charge cards at checkout, but their monthly statements won't require payment in full. Instead, credit cards give you the choice to pay off the balance in full to avoid interest. If you want to pay less, however, you can do so for a cost.
The interest rate on a credit card is used to calculate how much you owe if you carry a balance from one month to the next. Every month, your card statement will show a minimum required payment based on your balance. You should pay at least that much at minimum to avoid penalties. Most credit cards have a credit limit, which is the most you can borrow with the card at any given time.
Credit cards come in many forms and types. While my favorite are travel rewards cards like the Chase Sapphire Preferred Card, you can also find cash-back cards, cards for people new to credit, and simple cards with low rates and fees.
Charge card vs. credit card: what's better for you?
If you pay off your balance in full every month anyway, credit cards and charge cards are more or less the same. The big benefit of a credit card over a charge card is the ability to carry a balance. However, that can be a very expensive proposition depending on the interest rate and balance.
The temptation to buy a new TV, book a vacation, spruce up your wardrobe, and put other costs on a credit card, even if you can't afford it, might be too much for some people. In that case, a charge card is the better choice, as carrying a balance is not a choice.
The savviest credit card users treat their cards like a charge card regardless. The convenience and rewards of using a credit card are great, but it's not worth it for most people if that means paying 10%, 20%, or more interest. As a general rule, you should only use credit and charge cards if you can manage them responsibly and never buy more than you would have had you been using a debit card or cash.
So, which is better? It depends. Credit cards give you more flexibility paying off your balance, but otherwise, they are mostly the same thing. So you'll want to learn more about the top charge and credit card options, like the Amex Platinum and the Chase Sapphire Preferred, and then make your decision.
Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.
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Please note: While the offers mentioned above are accurate at the time of publication, they're subject to change at any time and may have changed, or may no longer be available.
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