Credit Cards Vs. Charge Cards: Know What's in Your Wallet

We all know about credit cards. Almost everyone has them. Those little pieces of plastic that you keep in your wallet and you can use to buy things just about anywhere. We also like to call them charge cards, but there are significant differences between charge cards and credit cards.

Almost everything we think of as credit card is, well, a credit card. Visa. MasterCard. Discover. These are all credit cards. Credit cards are essentially revolving lines of credit with a pre-set spending limit ($1,000, $5,000, $25,000, etc.).

At any time you can spend as much money as you want on your credit card, up to and including the total spending limit. At the end of the month you pay your credit card bill. This pays for interest on any balance left over from the previous month, plus some of the principal (although you can pay off as much of the principal as you like). Any balance remaining is forwarded to the next month, and you will pay interest on it again the next month.

Most credit cards have little to no fees, as they make most of their money off of the interest payments. This is very different from a charge card. The main charge card these days is American Express, as well as many Diners Club cards (the original charge card).

Unlike credit cards, charge cards have no official pre-set spending limit. Theoretically you can spend as much as you want on a charge card without any hassles (although depending on various factors you're spending might be cut off by the charge card company if they think you are spending too much).

The major difference when using a charge card is that it is not a revolving line of credit. A charge card is merely a temporary loan, and all balances must be paid off in full by the end of the month. If you spend $500 on your charge card you are going to have to pay $500 at the end of the month. There is no interest, but you have to pay fees, which can sometimes be fairly high.