Which is better: charge cards or credit cards?

Which is better: charge cards or credit cards? While they look the same, and many cards bear the logos of major lenders, there is a huge difference between credit cards and charge cards.

Despite their cosmetic similarities, a charge card works in an entirely different way from their credit counterparts. According to a report on the consumer advice website Mint Life, they don’t have a monthly limit, and consumers can spend as much as they want on them until the card’s issuer cuts them off. Instead, these cards carry what is referred to as a "shadow limit," meaning that the company assesses on a case-by-case basis what a consumer’s upper boundary for spending is.

The other major difference between the two is that balances on charge cards must be paid off in full every month, allowing consumers to remain debt free, the report said. While this might be a pain for consumers, it is actually beneficial to them in the long-term because it both keeps spending down and never accumulates interest. As a result of this, however, these cards typically come with annual fees.

Credit cards, on the other hand, do have credit limits, the report said, and common ones for low-end cards typically range from a few hundred to a few thousand dollars. These cards don’t have to be paid off in full every month, but do carry annual interest rates on any debt that is still unpaid on the account’s balance. This type of card, unlike charge cards, typically don’t carry annual fees as a consequence, since consumers are giving the lender plenty of revenues in the form of interest payments.

Because of these characteristics, both cards have their own benefits and drawbacks, the report said. Because charge cards basically guarantee that a consumer can’t find themselves deeply in debt as a consequence of using them – since it has to be paid off every month – they’re a good way for a consumer to establish a solid credit history. However, with no credit limit, the part of their score that’s governed by how much they can borrow is basically non-existent. Credit cards obviously offer that aspect, but also come with the looming threat of the consumer incurring lots of debt.

Consumers may find that they benefit from having both types of card, which will allow them greater flexibility in finding a payment method that works for them.