Entrepreneurs often have strong preferences about the tools they use in their business. But when it comes to the way they pay for purchases, there may be as much confusion as opinions about which type of plastic is best. This guide will help you understand the differences between credit cards, charge cards and debit cards so you can make an informed decision about which is best for your business.

First, here are the most basic descriptions of each of these popular payment methods.

Business credit cards allow you to purchase items up to your credit limit. You can repay them within the month to avoid interest charges (if there is a grace period), or you can make smaller payments over a longer period of time which will result in interest charges.

Business charge cards are similar to credit cards in that they allow you to pay for purchases up to your credit limit. Some charge cards do not have a predetermined credit limit and will approve larger purchases on a case-by-case basis. Charge cards require the balance to be paid back in a short period of time, usually within a month.

Business debit cards are tied to a bank account from which funds are withdrawn for each purchase. Most financial institutions will give you a debit card when you open a personal, business checking, or savings account.

How All Three Cards Factor Into Your Overall Business Financial Health

Credit cards, debit cards, and charge cards all play distinct roles in shaping your overall business financial health. Each type of card offers different benefits and considerations, and understanding how they factor into your business’s finances is essential for effective money management and growth.

Here are the main ways they affect your business’s financial health:

1. Cash flow management: Debit cards can be useful for day-to-day spending, ensuring you spend only what’s available. Credit cards provide a safety net for unexpected expenses or cash flow gaps, but it’s important to manage balances to avoid interest charges.
2. Credit building: Both traditional and charge cards contribute to your business credit history. Responsible use and on-time payments can positively impact your credit score, enabling you to qualify for better loan terms and credit offers.
3. Rewards and benefits: Business credit cards often come with rewards programs, such as cashback, travel rewards, or discounts on business-related expenses. These benefits can help you save money and reinvest in your business.
4. Emergency fund: Having a business credit card can serve as an emergency fund for unforeseen expenses, ensuring your operations continue smoothly during financial challenges. Your business debit card can also give you quick access to savings when needed.
5. Borrowing and financing: Business credit cards and charge cards can be useful for smaller purchases and short-term financing. However, for larger expenses or longer-term financing needs, you may need to explore other options like business loans or lines of credit.

All these types of cards each contribute to your business’s financial health in different ways. By understanding their advantages and potential pitfalls, you can make informed decisions about how to best utilize these tools to manage your business’s finances effectively and achieve your growth objectives.

Charge Cards vs. Credit Cards

The differences

If you’re deciding on a charge card vs. credit card, knowing the differences is key. 

One of the biggest differences between credit cards and charge cards is interest. Credit cards charge interest, but charge cards don’t. Interest is usually calculated based on your average daily balance. Most credit cards also offer a grace period, which means no interest will be charged if your balance is paid in full by the end of the grace period (usually around 25 days). Interest is usually calculated on the average daily balance. 

Charge cards don’t typically charge interest, but do require payment in full up front.

Another key difference: Credit cards have preset spending limits while charge cards do not. Both usually charge for late payments.

Effects on your credit score

Credit cards and charge cards both typically report both positive and negative information to credit reporting agencies. That means they can provide valuable credit references as long as you pay your balances on time.

Business credit cards are a little different. Some business credit cards do not report payment history to the owner’s personal credit reports if the account goes into default. On the other hand, some business credit cards report to business credit agencies, which can help build your business credit. 

Credit Cards vs. Debit Cards

The differences

One key difference between credit cards and debit cards is where the money you spend comes from. Debit cards draw money from your checking account, while credit cards borrows the money from a credit card company that acts as a lender and you pay over time. That’s why credit cards charge interest while debit cards don’t.

Credit cards also usually offer more lucrative rewards programs than debit cards, but their high annual fees can cost more than a debit card year-over-year.

Effects on your credit score

Using a credit card may help you build good credit. In contrast, debit cards don’t have this feature. Credit cards report your payments (including missing payments) to credit reporting bureaus, but debit cards don’t. So your debit card activity never affects your credit score.

Business Debit, Charge, and Credit Card Purchase Protection

Let’s examine the various protections cardholders like you have from fraud and other risks — and which types of cards offer them.

Truth in Lending Act

Credit and charge cards are covered by the Truth in Lending Act in the event of fraudulent use. This means that business owners and consumers are generally only liable for the first $50 in fraudulent charges, and only in cases where a card is presented in the transaction. (If it is determined that the fraudulent purchases were made online, for example, liability is zero.) This protection extends to personal and business credit cards.

Electronic Funds Transfer Act

Consumer debit cards are covered by the Electronic Funds Transfer Act (EFTA). In the case of fraudulent use, liability starts at $50 but may go up to the entire balance in the linked account, plus any overdraft line of credit. Business debit cards are not covered by federal law in the case of fraudulent use. Most debit cards are covered by voluntary “zero liability” policies that reimburse cardholders for fraudulent purchases, but it may take two weeks (or longer) until the bank account is reimbursed.

Credit Card Accountability Responsibility and Disclosure Act 

Consumer credit cards and charge cards are also covered by the Credit Card Accountability Responsibility and Disclosure Act of 2009 (often referred to as the “CARD Act”). This law protects individuals from a variety of practices such as interest rate hikes on existing balances at any time and for any reason, double-cycle billing, and floating due dates. Business credit cards and charge cards are not covered by this law, though many major card issuers have adopted many of these protections voluntarily. 

Debit cards — consumer or business — are not covered by the CARD Act.

How Charge Cards Work

Charge cards require you to pay back the full balance each month. They don’t cap your monthly spend unlike other card options, but you’ll be charged high late fees if you fail to pay back what you owe in time. There are fewer charge card issuers than other types of cards, so they may also be harder to find.

Charge cards generally require good to excellent personal credit scores to qualify. These cards can work well if you need to make a big purchase — as long as you can afford to pay it back by the end of the billing cycle.

Pros and Cons of Charge Cards

How Credit Cards Work

You can keep a balance on a credit card and avoid any hits to your credit score by keeping up with the minimum payment each month. Minimum payments are due at the end of each billing cycle. Credit cards often offer a variety of rewards which can include cash back, travel miles and more. (Here’s Nav’s guide to the best credit cards with rewards in 2022.)

Both personal and business credit cards typically involve a credit check of the owner’s personal credit scores. Credit cards are available to consumers with a wide range of credit scores. There are many types of credit cards, including for those with bad credit as well as cards that require excellent credit. Secured credit cards in particular are designed for consumers with no credit history or a poor credit history. Some retailers offer credit cards as well.

Pros and Cons of Credit Cards

How Debit Cards Work

Debit cards deduct the amount of your purchases from the associated checking or savings account immediately. No statement balance can be carried from month to month and therefore interest is not charged.

Debit cards don’t extend credit and therefore a credit check may not be required. Some financial institutions, however, may conduct a basic personal credit check or use a speciality credit agency like Chexsytems to determine whether the applicant has credit problems (like an open bankruptcy) or a history of bounced checks that may make opening an account risky.

Pros and Cons of Debit Cards

Qualifications

Both personal and business credit cards typically involve a credit check of the owner’s personal credit scores. Credit cards are available to consumers with a wide range of credit scores. There are credit cards for those with bad credit as well as cards that require excellent credit. Secured credit cards in particular are designed for consumers with no credit history or a poor credit history.

Charge cards generally require good to excellent personal credit scores to qualify.

Debit cards don’t extend credit and therefore a credit check may not be required. Some financial institutions, however, may conduct a basic personal credit check or use a speciality credit agency like Chexsytems to determine whether the applicant has credit problems (like an open bankruptcy) or a history of bounced checks that may make opening an account risky.

Credit Reporting: All Reports Are Not Created Equal

Credit cards and charge cards both typically report both positive and negative information to credit reporting agencies. That means they can provide a valuable credit reference as long as bills are paid on time.

Business credit cards are a little different. Some business credit cards do not report payment history to the owner’s personal credit reports if the account goes into default. In addition, business credit cards may be reported to business credit agencies, which can help build business credit.

Debit cards do not report to credit reporting agencies so they do not help build credit.

Costs

Any of these cards may charge an annual fee. Charge cards, in particular, often carry higher annual fees.

Most credit cards offer a grace period, which means no interest will be charged when there is a zero balance. Credit cards will charge interest if the balance is not paid in full by the end of the grace period (usually around 25 days). Interest is usually calculated on the average daily balance. Charge cards require payment in full, so interest is not typically charged.

Debit cards deduct the amount of purchases out of the associated checking or savings account immediately. No balance can be carried from month to month and therefore interest is not charged.

Business Rewards

Credit cards often offer a variety of rewards which can include cash back, travel miles and more.

Charge cards often offer premium rewards. American Express offers most charge cards in the U.S. Two popular cards include The Business Gold Rewards Card and The Business Platinum Card which both offer lucrative sign up bonuses and reward points.

Rewards on debit cards are typically only offered when the cardholder signs for a purchase and does not enter a PIN when making a purchase. They are generally not considered as valuable as most credit card rewards.

How to Qualify for Business Credit

Qualifying for business credit involves demonstrating your business’s financial stability, credibility, and ability to repay debt. Here are the basic steps to qualifying for business credit.

1. Establish your business: To separate your personal and business finances, consider establishing your business as an LLC, corporation, or another legal entity. This step is essential for building distinct business credit, and business formation services can help.
2. Get an EIN: An employer identification number (EIN) is a unique identifier for your business, similar to a social security number. It’s required for tax purposes and when applying for business credit.
3. Open a business bank account: A dedicated business checking account helps track and manage your company’s finances separately from personal funds. It also provides a clear record of transactions for potential creditors.
4. Register with business credit bureaus: Similar to personal credit reporting agencies, there are three major business credit bureaus that create business credit scores. Register your business and ensure your information is accurate and up-to-date.
5. Build a strong payment history: Pay your bills on time, including rent, utilities, and other business-related expenses. Consistently meeting your financial obligations helps build your credit history.
6. Review and correct credit reports: Regularly review your business credit reports for inaccuracies or discrepancies. Dispute any errors promptly to ensure your credit profile remains accurate.

Remember that building strong business credit takes time, often several years, so be patient and diligent in your efforts. Consistently managing your business finances responsibly will increase your chances of qualifying for better credit terms and higher credit limits.

Which Is Best For You?

Ultimately credit and charge cards carry greater protections and rewards debit cards. Entrepreneurs who use business debit cards in particular may want to consider charge cards so they are protected under federal law in the case of fraudulent use. Those who want to avoid an annual fee can choose a no annual fee credit card and simply pay the balance in full each month.