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Charge Cards: The Forgotten Option

For as long as I’ve been writing about personal finance, there has been an constant argument between credit cards and debit cards. Those who have first hand knowledge of how difficult it is to extricate yourself from credit card debt are right to argue that credit cards are evil. Those who have never carried a balance and happily spend their reward points, or cash the cash back checks, are also right to slam reward-less debit cards. I believe that you should understand your own strengths and weaknesses and pick the type of card that suits your needs.

However, in all the arguments, I very rarely see mention of charge cards. By definition, a charge card is simply a credit card that must be paid off in full every month. There is no minimum payment because there is only one payment – the balance in full. There is no interest rate because you can’t carry a balance. There is, however, usually a relatively severe penalty if you fail to pay in full.

This post is part of the Bargaineering Annual Financial Review [3] week series where we take a closer look at the four major facets of personal finance and see if we can do better. This post is part of day two – reviewing and optimizing your relationship with credit.

Benefits of Charge Cards

Charge cards have all of the major benefits of credit cards. You get access to a line of credit, so you don’t have to carry around quite as much cash. You also have a grace period on your purchases, until the statement closes. You may earn rewards based on your purchases, which you can convert into cash or products.

You also get the fraud protection that comes with credit cards. Debit cards have similar consumer protections but since they are directly linked to your checking account, you feel the effects of fraud immediately (just one of the reasons why I prefer credit over debit cards [4]). Fraudulent charges can have an immediate and cascading effect on your finances, not so on a credit card. Your money is safe either way, you have fewer headaches with charge and credit cards.

The most intruiging thing is that charge cards pre-date both credit and debit cards. The first “credit card” was the Diners Club card [5], which was a charge card.

Drawbacks of Charge Cards

Charge cards usually have no listed credit limit, which can have a negative impact on your credit score. Since there is no posted credit limit, it appears as $0 on some credit reports. This will make your credit utilization look higher than it really is, which can lower your credit score. The absence of the credit limit can also affect your purchasing power, since it won’t be clear how much credit you actually have.

Another drawback is that while you aren’t permitted you carry a balance, you can if you simply don’t pay. If you don’t make the full payment, you are charged a late fee that can be very high. Finally, there is usually an annual fee. Since the credit card company isn’t earning revenue from interest on revolving balances, they turn to annual fees to make up the difference. You have to decide whether the rewards from the card, and the other benefits, can overcome the fee and the other drawbacks.

Why American Express?

I mention American Express because, to my knowledge, they are the only major issuer of charge cards. Their flagship charge card products are:

All of the cards are part of the American Express Membership Rewards network [6], offer cashback reward earnings potential, as well as nice “luxury” service that you may or may not find appealing. The Preferred Rewards Gold card will give you 10,000 membership reward points if you spend $500 in 3 months (worth a $100 gift card), the Platinum will award you 25,000 points when you spend $1,000 in 3 months (worth a $250 gift card), and the Green awards you 10,000 points when you spend $500 in the first three months (worth a $100 gift card).

Remember when I mentioned annual fees? The annual fees on both of these cards is pretty substantial: American Express Preferred Gold’s annual fee is $125, the Preferred Green’s annual fee is $95, and the American Express Platinum has an eye-popping annual fee of $450. You get a lot of benefits for those annual fees (Platinum gives you complimentary access to Airport Clubs, those swank areas in some major hotels restricted to only their highest frequent flyers) and they are waived the first year, but it’s still something to be very aware of.

As you can see, they have rich cashback benefits (thousands of bonus points if you satisfy their purchase requirements) that you simply can’t get with debit cards. When you couple that with ongoing rewards, better fraud protection, and none of the balance carrying temptation, charge cards like the ones from American Express should be in the discussion.

That being said, I still think credit cards are better… just putting the option out there.