Credit Card or Charge Card?

Although many of us call any piece of plastic that allows us to spend now and pay later a “credit card,” there are important differences between an actual “credit” card and a “charge” card.

A credit card allows you to borrow money up to a pre-determined limit. You can choose to pay your entire bill when it arrives, and avoid finance charges, or pay just a portion of it and pay interest on the remaining balance. The major credit cards are Visa, Mastercard and Discover.

Like credit cards, charge cards allow you to make purchases now and postpone payment. But a charge card requires you to pay the entire balance each month. American Express is the most widely used charge card.

So, which card should you use? That depends on what’s most important to you.

If you want the option to finance your purchases over time, then a credit card is the way to go. Many also offer rewards programs that enable you to earn things like airline miles or cash back. (Detractors warn that rewards cards encourage overspending and can cost more in fees and finance charges than the value of the rewards themselves.)

Choose a charge card if you want to avoid the risk of racking up a lot of high-interest debt and you’re sure you won’t charge more than you can pay off each month. Charge cards typically have an annual fee, but you may be able to offset that through better rewards programs and freebies such as roadside assistance, hotel upgrades and rental car insurance.