It’s All About the Plastic: Charge Card vs. Debit Card vs. Credit Card
Trying to keep your different payment methods straight, like debit cards and credit credits? Learn the differences, pros, and cons to understand them.
Author: Arro Team
December 14, 2022|Blog
If you're like most people, you probably have a debit and credit card in your wallet, but do you really know the difference between these card types? Have you ever found yourself whipping out a card when making a purchase, not always caring which one you use? To add to the confusion, there’s even a third type: charge cards. Debit card vs. credit card vs. charge card — it really doesn't matter which one you choose, right?
Sure, they look the same and you swipe them (and they all offer some level of fraud protection — more on that below!), but for the most part that's where their similarities end. In this article we'll break down the key differences between each type of plastic card, so you can make a more informed decision before using them.
Debit Cards vs. Credit Cards vs. Charge Cards
When it comes to paying with plastic, there are two main types of cards: debit and credit, with charge cards as a third option deserving an honorable mention.
They all have their pros and cons, and each can have a unique impact on your personal finances. Here’s the lowdown:
A debit card is linked directly to your checking account. When you make a purchase, the money is immediately deducted from your bank account. Although it usually has a Visa or Mastercard logo on it, a debit card isn’t a credit card.
No interest charges — you’re using your own money, so you don’t pay interest
No annual fees or late fees
Helps you avoid racking up debt; since your purchases come directly from your bank account, there's no risk of falling into debt
It limits overspending; your debit card will be denied if you don't have enough money available in your checking account, so you're more mindful of your spending
Can be used at any retailer that accepts credit cards
The spending limit is your checking account balance
No perks or rewards programs (some card issuers may offer their own extras)
Potential non-sufficient funds (NSF) fees; there aren’t usually any fees associated with using a debit card unless it causes you to overdraw your checking account — then you may face overdraft fees from your financial institution
Not always accepted for holds at hotels or car rentals
In simple terms, credit cards are loans. Unlike debit cards, which are linked directly to your checking account, credit cards are revolving lines of credit that must be repaid — with interest if you carry a balance. Every time you make a purchase, you borrow money from the credit card issuer. Each month, you'll receive a credit card bill telling you what you owe by a specific due date.
Lets you manage your budget by buying now and paying when the bill comes due
Helps you build credit (stay tuned for more on this!)
Perks — credit cards often come with perks such as cash back or rewards points that you can redeem for travel or other purchases
Warranty coverage — believe it or not, some credit cards offer an additional warranty on certain card purchases (typically electronics) beyond what the manufacturer provides; if you've made a major purchase with your card, check with your credit card company to see if they offer warranties
Fees — credit cards usually have late fees, foreign transaction fees, and sometimes annual fees as well; understanding your card terms will help you avoid these charges
Interest charges — you pay credit card interest each month that you don't pay your total credit card balance on time; if your card has a high interest rate, it’ll take you longer to pay it off
Can damage your credit if not used responsibly
Risk of debt — irresponsible usage can lead to credit card debt
Your credit report is pulled as a hard inquiry and reviewed for approval which can impact your credit score (note: Arro only does a soft inquiry, so applying for an Arro Card will never negatively impact your credit score)
It's worth mentioning that department stores, gas stations, and other retailers often offer their own credit cards. They work a bit differently than standard credit cards, as you can only use them at that specific retailer. They're still reported to the credit bureaus, so — as always — make sure you pay on time.
A charge card is a slightly different version of a credit card. It’s also a loan — however, there isn’t a credit limit set by the lender. You may have heard the terms charge card and credit card used interchangeably, but the cards aren’t the same. Charge cards aren’t as common as they used to be, but they’re still out there so it’s worth knowing about the option.
No pre-set spending limit upfront — that doesn’t mean unlimited spending with wild abandon; instead, your spending ability is dynamic and based on things like your spending habits, income, credit score, and payment history
Perks and premium rewards — higher cash-back and concierge services are common bonuses
No interest charges — cardholders don't usually carry a balance since it must be paid off each month
Can reduce the accumulation of debt — charge cards don’t allow for balances to be carried over to the next month, as they have to be paid in full
You must pay off the entire balance each month; you don’t have the option to make the minimum payment or carry your balance to the next month like you would with a credit card
More rigid qualifications — they’re typically reserved for consumers with stellar credit (think: 800+) and higher income
Annual fees — because of the benefits charge cards offer, they typically have annual fees in the three-digit range
Sky-high penalty fees — if you fail to pay your card balance in full each month, you’ll get hit with some big-time fees; the penalty fee can vary, but it's generally 3% of your balance
Because charge cards and credit cards work similarly, you may be wondering — what’s the point of having a charge card? Is it better to have a charge card vs. a credit card?
Well, it depends on your spending habits and your financial behavior.
If you tend to use your card for retail therapy, you run the risk of having too high of a balance to pay off each month. In that case, a credit card would be a better choice, but it’s ultimately not the best money move. We know it’s easier said than done to curb spending habits, which is why we’ve compiled some tips for getting and staying out of debt.
However, if you already have a great credit score, spend within your means, and can handle a large lump-sum payment each month, a charge card may be a good idea due to its perks and flexibility.
Other Key Factors to Consider
Two additional features to consider when choosing among these cards are fraud protection and your credit score. Although we briefly mentioned these factors already, they’re pretty substantial, so they deserve a deeper look.
These days it can feel like card fraud is out of control. From gas station skimmers to online data breaches, it's hard to keep up. If you get hit with fraudulent charges and have to file a claim, you need to understand the different levels of protection you'll get depending on the type of card you use.
Purchases made with your debit card are covered by fraud protection through the Electronic Funds Transfer Act (EFTA). However, the protection isn’t as thorough and robust as it is for credit cards. Depending on how soon you report the fraud, you could be responsible from $0 to the full amount of fraud if it’s not caught quickly enough. Because your card is attached to your bank account, fraudulent charges can tie up the funds in your checking account, leading to more frustration.
Credit Cards and Charge Cards
The fraud protection offered on credit and charge cards is the same. If you have fraudulent purchases or unauthorized activity on either card, the most you’ll be liable for is $50 per the Fair Credit Billing Act (FCBA). Many card issuers offer $0 fraud liability on credit card fraud, making it an attractive card of choice. Your credit card company will quickly replace your compromised card, giving you access to your credit line without an extended interruption.
Impact on Credit
Do all plastic cards affect your credit and your credit score? Whether you're trying to build up your credit or pay down debt, all cards are not created equal when it comes to your credit score.
Your debit card doesn't impact your credit score because it's not a loan, so it doesn't get reported to the credit bureaus (which means you also don’t need a credit check to get one). So why are you prompted at the register to choose debit or credit?
To put it simply, the difference is how the charge is processed and the fees incurred by the merchant. The purchase still comes out of your checking account; it can just take a few days if you use the credit option, compared to the same day when using your PIN (the debit option). Using the debit option means you’ll have a real-time update to your checking account balance.
Credit cards can help you build credit, since they’re loans that have to be approved by lenders. Your balance and activity are reported to the credit bureaus. This builds your credit history, which is a significant factor in calculating your credit score. They can also hurt your credit if you don’t make your payments on time or carry too high of a balance.
A charge card also impacts your credit score. Although it’s reported to the credit bureaus, the information is reported differently than a credit card. Because there isn’t a set limit on a charge card, the balance isn’t reported, so it doesn't impact your credit utilization ratio. But your payment history is reported, which heavily impacts your credit score, so making sure you always pay on time is still important.
Which Card Should You Use?
Understanding how a charge card vs. debit card vs. credit card works is key to determining which card best fits your particular financial situation. One doesn't always trump the other; it depends on the scenario and how you manage your finances.
If you want to get cash from the ATM or cash back at the register, use a debit card. Using your credit card for cash advances is a one-way ticket to fees, higher interest, and a total hassle of paying your balance back. Generally, the amount of cash you advance from your card has its own (much higher) interest rate. It's not a pretty picture, so avoid it at all costs.
Because of the strong fraud protection with credit cards, many consumers choose to use their credit cards for all purchases, even everyday items like groceries and gas. They then pay it off in full each month. That way, they earn rewards and have the peace of mind of knowing they won't be liable if fraudulent charges occur.
If you want to earn rewards or cash back for your spending, the best option would be a credit or charge card vs. a debit card. Remember not to spend just for the sake of earning these rewards though.
If you're trying to avoid racking up debt or working on paying down existing credit card debt, stick to using your debit card.
If your money is tight and you need some flexibility with your spending, then a credit card or charge card is your best choice. That way, you don't have to have the funds available to pay for purchases immediately.
If you’re trying to build credit, using a credit card or charge card vs. a debit card will help since they’re both reported to the credit bureaus.
Regardless of the card you use, tracking your purchases is essential to avoid overspending and spotting fraudulent charges quickly.
Your Spending Habits Determine Which Plastic Card Is Right for You
In order to make smart personal finance choices, you need to know how different financial tools work and how they can affect you, your bank account, and your credit.
While credit and charge cards are essentially loans and get reported to the credit bureaus, debit cards work strictly with the funds in your checking account. Each card has its advantages and disadvantages. Ultimately, the best way to decide which type of card is right for you is to carefully consider your spending habits and financial goals.
Here at Arro, we're passionate about helping consumers learn about their finances, build credit, and develop healthy financial habits. With our Arro Card, your credit score isn't used for approval — join our waitlist today!