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What's the difference between a credit card, a debit card, and a charge card?

Here's a look at the advantages and disadvantages of each one.
Written by Trent Hamm, Contributing Writer on
Reviewed by Marc Wojno

I once wrote an extremely brief article covering the difference between charge cards and credit cards. That article didn't quite answer the question, though, because I still have conversations and receive emails where people use the phrases "charge card" and "credit card" interchangeably.

Then, I realized that it's worthwhile to distinguish between all three types of cards by listing their advantages and disadvantages. So let's go through them one by one.

Credit cards

A credit card is borrowed money. When a company issues you a credit card, you're given a specific credit limit -- the maximum amount you can borrow from the company. Each time you use the card, you borrow some amount from that company, and you're required to pay back a portion of that amount to the company every month. Mastercard, Visa, and Discover are the major types of credit cards.

Advantages of a credit card

The biggest advantage of a credit card is flexibility; you can make purchases without actually having the cash on hand at the moment. You also have an indefinite amount of time to pay back that money, though you do have to make a minimum payment each month on what you owe. 

Many credit cards also have rewards programs and benefits, offering everything from 2% cash back on all purchases to rental car insurance when you travel. Consumer protection with credit cards is usually pretty strong, too; they'll often help you deal with fraudulent purchases and don't leave you out to dry if you lose the card.

Also, a good credit card use helps you build a good credit report, saving you money on insurance and helping you with loans in the future. 

Disadvantages of a credit card

The big disadvantage is that all the flexibility is a double-edged sword. The ease of using credit cards and the lack of pressure to pay off what you owe make it very easy to make poor purchasing decisions. Then, when you can't pay off the card, you usually pay a hefty amount of interest on that unpaid amount.

Over a long period, that interest can be incredibly costly.

Debit cards

A debit card is linked to your checking or savings account. Each time you use the card, money is automatically taken from your checking or savings account to cover the purchase. 

Advantages of a debit card

You can't get into debt trouble with a debit card, since it does not allow you to spend more money than you have in your account. This is a huge advantage for people struggling with debt because it keeps them from overspending. 

Plus, debit cards are flexible and convenient for day-to-day purchases. You also don't have to have good credit to get a debit card; you often get one with your checking account.

Disadvantages of a debit card

The biggest disadvantage is that you have to keep a very close eye on your account balances because you can overdraft your account if you're not careful. Debit cards often don't have the same consumer protections that credit cards and charge cards have -- if your card is stolen, your protection against unauthorized purchases can be weak.

Another disadvantage is that very few debit cards have rewards programs of any kind. 

Charge cards

Charge cards are often confused with credit cards, but they function in a fairly different fashion. Like credit cards, charge cards extend credit to you from the issuer. However, you're required to pay the full balance at the end of the month. 

Some charge cards also have an annual membership fee. Charge cards are typically associated with American Express; many store chains often issue their own charge cards as well, which can only be used at that store.

Advantages of a charge card

You don't have to have the money on hand for a purchase with a charge card, nor do you run the risk of carrying a balance that will charge you interest. 

Many charge cards have tremendous bonus programs from things like 5% cashback to free companion flights on airlines -- their rewards programs are typically better than rewards programs for credit cards. Charge cards often come with additional services and benefits, like free roadside assistance, free food at airports and free hotel room upgrades. 

They help your credit much as a credit card does. Most charge cards offer strong consumer protection as well, similar to that of credit cards.

Disadvantages of a charge card

Some charge cards have an annual fee, which eats away at the benefits from using them. Also, since you are operating on credit, there's some risk that you might build up a large balance on the card that will be difficult to pay off. 

Many charge cards are usually pretty strict in terms of who they're issued to; you need to have good credit before even getting one.

Which one is right for you?

Many people wish to avoid credit at all costs because of the risk of debt. In that case, a debit card is obviously the right choice. If you're seeing a great debit card (preferably one that has some semblance of a rewards program), you should investigate all of the checking options available at your local bank -- and maybe do some shopping around for a new bank, particularly if you're unhappy with your current bank.

It's worthwhile for everyone to apply for at least a single credit card and use it irregularly. It provides a very easy way to build a positive credit report and gives you some flexibility in purchasing. If you have a good rewards card, you can also earn cashback and other benefits.

If you have excellent credit, pay your balance back in full each month on your credit card, and travel a bit, it's worth examining some of the charge cards offered -- particularly if you're running a small business. Typically, you can get a big net benefit from a good charge card, but you have to educate yourself about the benefits.

Overall, if you've never owned a card, it's smart to get a good checking account and use their debit card for most purchases. At the same time, it's wise to get one credit card and use it for only a few purchases. This allows you to start building healthy credit without the debt risks of a credit card.

[This article was first published on The Simple Dollar in 2020. It was updated in March 2022.]

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