Morningstar Solutions
Morningstar Solutions
Credit, Debit, or Charge?
Credit, Debit, or Charge?
Your personal spending habits should determine which type of card you choose. Do you pay your whole balance on time every month, or are you struggling to make minimum payments?
Credit Cards

What they are: Credit cards are essentially loans in the form of a revolving line of credit. You can borrow up to a certain amount from the credit card issuer (typically a bank) for purchases, regardless of whether you actually have the money on hand to pay for it.

Advantages: Widely accepted, frequently have no annual fee, and usually offer rewards such as a percentage of cash back. They also protect against unauthorized use: your assets are not immediately impacted, and you may refuse to pay the bill until the problem is resolved.

Disadvantages: It's easy to dig yourself into debt. Since cardholders only have to make minimum payments each month, and balances frequently face steep interest charges, it is possible to rack up huge balances.

Debit Cards

What they are: Debit cards directly deduct money from your checking or savings account when you make a purchase.

Advantages: You can only spend money you have, so you can't put yourself into debt. There is usually no annual fee, and you do not need good credit to get one.

Disadvantages: You have to keep a close eye on your checking account to make sure you do not overdraw and face charges. Most banks automatically charge an overdraft fee of around $30 if you out-spend your balance. Debit cards also offer limited protection against unauthorized use, and your money is already gone if you notice something amiss. They do not help you build credit and you will receive few rewards.

Charge Cards

What they are: Charge cards are similar to credit cards in that you are spending borrowed money. However, they have no pre-set credit limits and you must pay off your balance each month. American Express is the main player here (but not all Amex cards are charge cards--Amex offers some traditional credit cards as well).

Advantages: Frequently have great rewards and offer similar protections against unauthorized use as credit cards. You will not face huge interest charges since you are not allowed to carry a balance.

Disadvantages: Usually carry annual fees, which you must weigh against the rewards. You will still face late payment fees. Very good credit is typically required, and they are accepted fewer places than credit cards like Visa and MasterCard.

Do You Pay in Full?

If you pay off your full balance every month, credit cards are usually your best bet. Look for cards with no annual fee and competitive benefits. A charge card can be a good option for better rewards, but you will need to weigh the annual fees. Charge cards are typically more attractive for those who make large purchases or travel frequently. Charge cards could start looking more appealing than credit cards if credit cards boost fees and reduce rewards.

Do You Have Debt Trouble?

Stick with debit. It will force your spending to match your means and prevent you from getting into debt that is difficult to manage. Charge cards offer a middle ground, but it may be difficult to qualify for one if you have poor credit. While a charge card forces you to pay off the balance each month, the lack of a concrete spending limit can pose a problem for those with a tendency to overspend. To build or repair your credit without tempting yourself to overspend, you can use a credit card once or twice per month and pay off the balance, while using your debit card for most purchases.

Click here to learn how to control your credit.

Do You Have a Short Credit History?
A credit card is a good way to start building your credit. You may only be able to a card with a low credit limit, but paying it off every month will help you establish a good credit score that will allow you access to better offers in the future. The key, of course, is to make sure you pay off your balance every month.
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Credit, Debit, or Charge?
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