Credit Card vs. Charge Card vs. Debit Card: What’s The Difference?

Credit Card vs. Charge Card vs. Debit Card: What’s The Difference?

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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.

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.

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.

Debit cards are tied to a bank account from which funds are withdrawn for each purchase. Therefore, you will get a debit card from your financial institution where you have a personal or business checking or savings account.

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.

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Credit Reporting

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.

Protections

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.

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.

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.

Rewards

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 Business Credit Cards for 2018.)

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.

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.

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About the Author — Gerri serves as Education Director for Nav, which provides business owners with simple tools to build business credit and access to lending options based on their credit scores and needs. She develops educational programs and content for small business owners, and works on advocacy initiatives. A prolific writer, her articles have been featured on popular websites such as Yahoo!, MSN Money, ABCNews.com, CBSNews.com, NBCNews.com, Forbes, The Today Show website and many others.

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