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


I once wrote an extremely brief article on the difference between charge cards and credit cards. This article didn’t quite answer the question, however, because I still have conversations and receive emails where people use the terms “payment card” and “credit card” interchangeably.

Then I realized that it was worth distinguishing the three types of cards by listing their advantages and disadvantages. So let’s review them one by one.

Credit card

A credit card is borrowed money. When a company issues you a credit card, you are given a specific credit limit, which is the maximum amount you can borrow from the company. Every time you use the card, you borrow a certain amount from that company and you have to repay a portion of that amount to the company each month. Mastercard, Visa and Discover are the main types of credit cards.

Benefits of a credit card

The biggest advantage of a credit card is flexibility; you can make purchases without having cash on hand yet. You also have an indefinite time to pay that money back, although you must make a minimum payment each month on what you owe.

Many credit cards also offer rewards programs and perks, ranging from 2% cash back on all purchases to rental car insurance when you travel. Consumer protection with credit cards is also generally quite strong; they will often help you deal with fraudulent purchases and won’t leave you dry if you lose the card.

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

Disadvantages of a credit card

The big downside is that all flexibility is a double edged sword. The ease of use of credit cards and the lack of pressure to pay off what you owe makes it very easy to make bad purchasing decisions. Then when you can’t redeem the card, you usually pay a heavy amount of interest on this unpaid amount.

Over a long period, this interest can be incredibly expensive.

Debit cards

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 Each time you use the card, money is automatically withdrawn from your checking or savings account to cover the purchase.

Benefits of a debit card

You can’t go into debt with a debit card because it doesn’t allow you to spend more money than you have in your account. This is a huge advantage for people struggling with debt, as it prevents them from overspending.

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

Disadvantages of a debit card

The biggest downside is that you need to monitor your account balances very closely, as you can overdraw your account if you’re not careful. Debit cards often don’t have the same consumer protections as credit and charge cards – if your card is stolen, your protection against unauthorized purchases may be weak.

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

Payment cards

Charge cards are often confused with credit cards, but they work quite differently. Like credit cards, charge cards give you credit from the issuer. However, you must pay the full balance at the end of the month.

Some charge cards also have an annual fee. Payment cards are usually associated with American Express; many chain stores often issue their own payment cards, which can only be used at that store.

Benefits of a payment card

You don’t need to have the cash on hand to make a purchase with a charge card, nor do you run the risk of having a balance that will charge you interest.

Many charge cards have huge bonus programs ranging from 5% cash back to free flights on airlines – their rewards programs are usually better than credit card rewards programs. Charge cards often come with additional services and benefits, such as free roadside assistance, free food at airports, and free hotel room upgrades.

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

Disadvantages of a payment card

Some payment cards have annual fees, which reduce the benefits of using them. Also, since you are operating on credit, there is a risk that you will accumulate a large balance on the card that will be difficult to repay.

Many credit cards are generally quite strict in terms of recipients; you need to have good credit before you even get one.

Which one is good for you?

Many people want to avoid credit at all costs because of the risk of indebtedness. In this case, a debit card is obviously the right choice. If you see a great debit card (preferably one that looks like a rewards program), you should investigate all the verification options available at your local bank – and maybe do some shopping for a new bank, especially if you are not satisfied with your current bank.

It is worth everyone asking for at least one credit card and using it irregularly. It provides a very simple way to establish 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 great credit, pay off your credit card balance in full each month, and travel a little, it’s worth looking into some of the payment cards on offer, especially if you run a small business. Generally, you can get a big net benefit from a good credit card, but you need to educate yourself about the benefits.

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

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


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