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Debit cards are tied to a bank account from which funds are withdrawn for each purchase. Most financial institutions will give you a debit card when you open a personal, business checking, or savings account.
Charge card vs. credit card: 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.
Charge cards vs. credit cards: 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.
Credit cards vs. debit cards: 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.
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
Pros
Charge cards don’t charge interest. They also 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.
Additionally, 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 (liability for fraudulent purchases made online is zero).
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.
Cons
You can be charged a high fee if you fail to pay off your charge card balance in full when it’s due (it’s usually a monthly payment). Additionally, any of these cards may charge an annual fee, but charge cards often come with higher annual fees than the others.
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
Pros
Credit card issuers can provide great perks for everyday spending, like cash back rewards and points. Using credit cards may also help increase your credit score since your payments are reported to credit bureaus.
Like charge cards, credit cards can offer good consumer protections. The Truth in Lending Act protection mentioned above extends to both personal and business credit cards. Consumer credit cards are also covered by the CARD Act.
Cons
Credit cards may charge a high annual percentage rate (APR), which is another way to say interest. Your credit score may go down if you rack up large balances or fail to make on-time payments. Paying your bills on time and keeping your credit utilization low is a good way to keep your credit score strong. For more on what credit utilization ratio means, read this article.
Finally, business credit cards are not covered by the CARD Act, though many major card issuers have adopted similar protections voluntarily.
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
Pros
You don’t have to worry about late payment fees with debit cards since you don’t need to make periodic payments.
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 event of fraudulent use. Most debit cards are covered by voluntary “zero liability” policies that reimburse cardholders for fraudulent purchases, though it may take two weeks (or longer) until the bank account is reimbursed.
Cons
Debit cards only allow you to spend as much as you have in your checking account. If you overspend and don’t have overdraft protection, you will likely get hit with an overdraft fee. Debit cards — consumer or business — are also not covered by the CARD Act, so your transactions aren’t as secure as with a credit card.
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.
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
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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