What is the difference between a charge card and a credit card and when should I use a debit card?

Picture yourself at the retail counter after a big shopping spree. Your must-haves are scanned, your wallet is in hand and the clerk’s voice rings out: “Charge, credit or debit?”

No matter how you pay, you get to go home with your goods — but what happens to your credit score, your consumer credit history and access to future funds differs dramatically based on how you choose to pay. To understand how best to use each form of cashless payment, it’s best to first understand what and how each type works. What is the difference between a charge card and a credit card? When does it make more sense to use a debit card? Finally, does one option offer better perks and advantages over another?

What’s the difference between a charge card and a credit card?

At the point of transaction (and in your wallet or e-wallet) there seems to be little difference between a charge card and a credit card. Both are physical or virtual cards that allow you to make online or point-of-transaction purchases, without the need to handle cash. But there are distinct differences between a charge card and a credit card.

The main difference between a charge card and a credit card is that the balance on a charge card must be paid in full, each month. This can be a massive advantage for people looking for short-term credit without paying interest fees. The requirement to pay the balance in full — or incur late penalties — incentivizes charge card users to prioritize paying off the balance each month. Another advantage is that the ongoing repayment of the charge card balance helps establish an excellent credit history for the cardholder, and initiates a bump up in their credit score.

Another difference between a charge card and a credit card is how these revolving credit accounts appear on your credit report. A credit card appears as revolving credit — a loan you can use over and over again. A charge card appears on your credit report as an “open credit” — a pre-approved loan between you and the charge card lender. With an open credit, the lender can impose an end date or repayment terms, although, most charge cards also function as a revolving (or ongoing) form of credit.

The most well-known charge cards in North America are the American Express charge cards. Think American Express Platinum card or the prestigious Amex Black Card.

When using a charge card, the borrower has no pre-set spending limit on purchases. These are the cards used to purchase luxury cars and other expensive consumer goods. With no pre-set spending limit, charge cardholders can purchase virtually anything — as long as the purchases are approved by the lender. (Approval is based upon a variety of factors, including your credit history, account history and personal resources.) To determine how much can be spent, most charge card lenders offer online tools. The Amex tool is appropriately called the “Check Spending Power” tool. By checking this tool, charge card holders know how much they can spend at any given time. Another option is to enter a single amount in the tool and the lender will tell you if the purchase amount would be approved or not.

What’s the difference between a credit card and a debit card?

Now that the difference between a charge card and a credit card is clear, what is the difference between a credit card and a debit card?

When you use a credit card, you are using borrowed money — money provided to you by the credit card lender, on a short-term basis. Using a credit card allows you to use money now, but pay using your own earnings, later.

When you use a debit card, you are spending your own money immediately. The funds for the purchase are deducted from your chequing account (or savings account or money app) almost instantly. Using a debit card means using your money, now, not later.

Pros and cons of charge cards, credit cards and debit cards

Option	Pros	Cons
Charge	Credit Limit: No preset limit (but spending is not unlimited) Interest Rate on Balance: No APR Availability of Funds: Ongoing, as long as the balance is paid in full each month Perks: Earn points (usually high spend-to-point ratio) + protection plan and travel perks with most accounts	Late Fees: Late fees apply if you don’t pay your balance in full, each month Accessibility: Very few in the market + strict approval requirements Credit Score Requirements: Very good to excellent Termination: The account can be cancelled by the lender if you do not pay your account consistently, on time Annual Fees: Can be very high, compared to credit card options
Credit card	Credit Limit: Yes. Up to a preset spending limit Interest Rate on Balance: Fixed or variable APR Availability of Funds: Ongoing — balance does not need to be paid in full to access additional funds, up to your limit Late Fees: Depends on the card (may only be charged interest on the outstanding balance) Accessibility: Massive variety in the marketplace + easier to qualify for (even with bad credit) Credit Score Requirements: All credit scores — from no credit to excellent credit Perks: Earn points or cash back + protection plan, insurance and additional perks, depending on card	Late Fees: Depends on the card (may only be charged interest on the outstanding balance) Minimums: The merchant may impose a minimum transaction amount. Interest Rate on Balance: Fixed or variable APR that’s charged against any outstanding balance owed. APRs are often very high, compared to other types of credit loans Annual Fees: Depends on card
Debit	Credit Limit: Yes. Up to the amount currently held in your bank account Interest Rate: No interest rate fees Annual Fees: No fees to use a debit card Credit Score Requirements: None. Debit cards come with bank accounts, and anyone can open a bank account, regardless of their credit history	Transaction Fees: May need to pay overdraft fees, if there are insufficient funds to cover a debit transaction. You could also pay transaction costs if your bank account limits or charges a fee for debit transactions No Perks: Fraud protection is limited with debit transactions + most debit cards do not offer perks or rewards (but some, like Neo Financial, can offer cash back on debit purchases)

How to use a debit card, credit card and charge card at point-of-sale terminals

Most point-of-sale terminals offer two cashless transaction options:

• Credit. Select credit and either tap, insert or swipe your credit card. In some stores, you will be required to enter a pin or sign for your purchase. Most credit cards with chips will allow you to tap — a safer option, than swiping a credit card. When you tap a credit card, most point-of-sale terminals will require you to enter a four- to six-digit personal identification number (PIN). In America, you may also be asked to enter your zip code. Once approved, your transaction is processed through the card’s network — either Visa, Mastercard or Amex. You may also be asked to pay a small fee (between 1% and 5% of the transaction amount) in order to use a credit card. This is because business owners must pay fees to the credit card network — and these fees eat into the margins of profit for small business owners. Finally, the point-of-sale transaction you just completed is added to your credit card account — first, as a pending payment and, finally, as a transaction.
• Debit. Select debit and either tap, swipe or insert your debit card into the point-of-sale machine. Enter your four- to six-digit PIN, and your transaction is processed through a payment processor system like Moneris. Like credit cards, some merchants may pass on the cost of processing a debit card transaction to you, their customer. The moment the transaction is completed, that amount is deducted from the chequing or savings account associated with your debit card.
• Charge. Charge cards work exactly the same as credit cards.

How do contactless payments work?

Contactless pay technology lets you make quick, tap-and-go payments but, typically, sets a limit on how much you can spend, per transaction. In most cases, the limit is between $100 and $250.

Like a point-of-sale transaction, funds used for contactless payments are either added to your charge or credit account balance or deducted from your bank account. If you have multiple accounts linked to your debit card and are unsure where funds are drawn from for a purchase, contact your bank.

Does it take longer to process charge or credit card payments vs. debit card payments?

Debit card transactions are processed and the funds are deducted from your spending account, immediately.

On the other hand, charge and credit purchases are processed through the credit lender and are considered “pending” until the retailer processes their credit payments in bulk. Some retailers will process credit card payments at the end of every business day, while others will process payments once a week. Because of that, credit card payments tend to take longer than debit transactions to become fully processed and appear on your statement.

Does it matter whether or not I use my charge, credit or debit card?

In short, yes. When using a debit card, you spend money immediately. Using a charge or credit card allows you to pay for it later.

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When using a debit card might be better

If you’re trying to stick to a budget, then using debit only can sometimes help. Since debit doesn’t allow you to borrow funds — you can only use funds that are currently available in your spending account — you reduce the risk of incurring debt.

When using a charge or credit card might be better

A charge card is advantageous when spending a large quantity of money and you don’t want to carry around a large sum of cash or be denied making a payment due to credit card account limits.

Using a credit card offers the advantage of postponing the use of your own earned money with the addition of a perk or bonus, such as credit card awards or cash back. Keep in mind, however, that a credit card payment is just a short-term loan and not paying off the loan before the due date can mean extra fees and charges added to that purchase.

Another advantage to using a charge or credit card is the ability to dispute fraudulent charges. When you pay using your credit card, you get the security benefits of Visa or Mastercard — if there’s a problem or you didn’t make that purchase, you can usually find a resolution with the card’s fraud department.

Bottom line

While the difference between a charge card, credit card and debit card varies very little at the point of use, the choice between each type of payment should be based on very different factors. For those looking to limit the risk of debt, using debit cards has a big advantage. For people looking for a few perks and bonuses on everyday spending, then using a credit card is best. Finally, for people who want to make large purchases without the inconvenience of carrying large quantities of cash or obtaining alternative methods for large sum transfers, then using a charge card is ideal.

This article originally appeared on finder.com/ca and was syndicated by MediaFeed.org.

About the Author

Romana King is the Canada Group Editor at Finder and a personal finance expert. As an award-winning personal finance writer and real estate expert, she has spent almost two decades helping Canadians make smarter money management decisions. Her first book, House Poor No More: 9 Steps That Grow the Value of Your Home and Net Worth, launched in November 2021, continues to be an Amazon bestseller and won the Excellence in Financial Journalism Book Award in 2022.