Mike Winters* explains the difference between a charge card and credit card (and why it matters).
If you’ve heard the phrase “charge card” and thought it was referring to a credit card, that would be understandable since the terms are often used interchangeably.
However, a charge card is an entirely different product with no credit limit or interest charged, unlike a credit card.
Here’s a closer look at the difference between the two.
What is a charge card?
Charge cards are increasingly rare, but they do offer some advantages — as well as drawbacks — when compared to credit cards:
- There’s no spending limit, which means that you don’t have to worry about your card being declined.
Obviously, this can be an advantage if you need to make regular large purchases, which is a reason why this card is popular with business owners or the self-employed.
- You have to pay off your balance every month, otherwise you’ll get charged steep late fees.
If you incur too many late fees, your card can be suspended or closed.
- There’s no interest charged.
The flip side of having to pay your charge card’s balance off every month is that there really isn’t any long-term debt involved, so interest isn’t charged like what you see with credit cards.
This is great for avoiding a lot of debt, but you do lose some flexibility in paying off a large purchase over a few months rather than just four weeks.
- High annual fees: Since lenders can’t make money off the interest payments with charge cards, they make up for that lost revenue by charging annual fees that can cost hundreds of dollars.
In contrast, many credit cards don’t charge an annual fee at all, so what you’re really paying for is the higher credit limits for big purchases.
Should you use a charge card?
That really depends on whether you make regular 5-digit purchases every once in a while, since most credit cards already offer pretty high limits for most borrowers.
Plus, you’ll need dependable cash flow to ensure that you’ll be able to pay off these purchases each month (which is another reason why charge cards are well-suited for small business owners).
If you already pay off your monthly bill no matter what, and would like the benefit of unlimited spending, then a charge card might be a good option for you.
*Mike Winters is a contributor at Life Hacker.
This article first appeared at lifehacker.com.