Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Charge Card

What it is:

A charge card is a plastic card issued by a financial institution that allows the user to make purchases with funds borrowed from that financial institution.

How it works (Example):

Colloquially speaking, a charge card is the same as a credit card. When a person uses a charge card to make a purchase, he is essentially authorizing the charge card issuer to pay the merchant on his behalf. The merchant must verify that the charge card is the user's by swiping the magnetic strip on the back of the credit card or obtaining identification in other ways (via a PIN number or other identification). Merchants generally like to take charge cards because they are almost immediately paid by the card issuer. Merchants must pay a fee to the card processing company for each transaction, however.

Here is the primary difference between charge cards and credit cards: Credit cards have limits, meaning that there is a maximum amount the user can borrow. The issuer determines the limit based on the user's credit rating and credit history. Charge cards have no limit. Charge cards are not the same as debit cards, which allow the user to withdraw funds directly from his or her own checking account to make purchases.

Here's another difference: Charge cards require the user to pay his or her balance in full, usually on a monthly basis. There is no paying the balance over time, as is the case with credit cards. Many charge cards also charge a yearly fee, late payment fees, cash-advance fees and foreign-currency conversion fees.

Why it Matters:

Charge cards allow users to avoid carrying cash, earn frequent-flier miles, or earn other "rewards." They are usually accepted around the world. In many cases, the cardholder can get cash advances through ATMs as well. Many charge cardholders underestimate the time and money it takes to pay off the monthly balances. It is also important to note that charge card numbers are often stolen; therefore, it important for users to protect their privacy and to check their credit reports frequently.