Charge Cards vs Credit Cards

While working with a client recently, I noted that she was using the terms credit card and charge card interchangeably.  When I pointed this out to her, she asked if there was actually any difference between the two.  In fact, there is a significant difference.  To fully understand the difference, it is necessary to review a little bit of history.

Prior to the advent of either type of card, consumers generally could not buy merchandise until they had accumulated sufficient cash to pay the price in full.  There simply was no way to obtain the goods or services without the cash.

In the 1920’s, some merchants began offering “buy now and pay later” plans.  These plans allowed consumers to buy that specific merchant’s products or services and make payments over time.  This type of account is representative of charge cards.  They are only accepted by the specific merchant or firm that issued the line of credit.

In the very early 1950’s, a program was introduced that allowed people to purchase meals at any participating restaurant regardless of brand or affiliation.  At the end of the month, the balance on the account had to be paid in full.  Although it was not possible to carry a balance from month to month, this program was an early type of a credit card.

The first credit cards that permitted account holders to carry balances from one month to the next were introduced in the late 1950’s; and, the marketing and use of these accounts became very widespread in the 1970’s.  Today, consumers in the United States are carrying in excess of $790 billion in balances on revolving credit cards!  ¹

As we consumers move forward in our economic lives, debating how to pay for the goods and services that we want or need, it will be important to keep these differences in mind as they will impact how (and how much) we pay for our purchases.

¹ Federal Reserve Statistical Release dated October 7, 2011; data is through August 2011.