What is the difference between a credit card and a charge card?

Although many people use the names interchangeably, credit cards and charge cards are two very different financial tools. While both of them take the place of cash during transactions, they may have very different ramifications.

According to Forbes, here are some differences between a credit card and a charge card.

Features of a charge card

A charge card allows you to place expenses onto your account with the understanding that you pay the balance off each month. While they generally come without a spending limit, if you plan to make a large expenditure you should probably call your issuer ahead of time to receive authorization for this purchase. Knowing that you must pay your charges off in full each month helps keep a rein on your spending and may teach you to budget well. However, failure to pay off the balance one month incurs substantial penalties and fees.

There is generally an annual fee associated with the privilege of holding a charge card and many have accompanying rewards that people find advantageous. Your credit is important to obtain a charge card, but even those with less than stellar credit might qualify for what is known as a secured charge card.

Features of a credit card

A credit card comes with a spending limit that the issuer may raise or lower periodically. While you do not need to pay your balance off in full each month, the credit card company charges you interest which can add up substantially over time if you carry a balance. This can lead to financial problems in the future and many people with substantial credit card debt find that filing for bankruptcy or other debt relief is the best way to get back on solid financial footing.

Even those without good credit usually qualify for a credit card. Some credit cards come with annual fees and rewards, while others have no annual fee. There may be an introductory offer for 0% APR for several months, which can allow you to make a big purchase on the card without accruing interest during this period of time. Carefully considering your best options and staying within your budget is the key to good financial health.