Charge Cards Versus Debit Cards

Charge cards, plastic that allows you to charge goods and services and then pay the balance in full every month, are becoming more popular again. Are they the way to go over debit cards for the responsible spender?

Charge cards, plastic that allows you to charge goods and services and then pay the balance in full every month, are becoming more popular again. Are they the way to go over debit cards for the responsible spender?

A Wall Street Journal article got me thinking about charge cards. I could never understand why someone would have an Amex card. Other than the two free airline tickets I received in college, I've never had a desire to open one. The cards provide the ability to charge, but not the ability to carry a balance.  Unlike charge cards, debit cards are attached to your checking account, and withdraw funds as soon as, or shortly after the purchase has been made. This has always been the gold standard for personal spending. Pay for something at the time of purchase. Let's look at some criteria to compare:

Charge Cards vs Debit Cards

Balancing Budget:

Debit cards remove fund almost immediately after a purchase. If your checking account doesn't have the funds, you can overdraw the account and receive an overdraft fee. Recent legislation from Congress aims to prevent banks from charging overdrafts on debit cards. Instead, the transaction will just fail.

Charge cards allow you to spend up to your card limit until the end of the month. At that point, the bill must be paid in full. If you've spent money you can't pay back, be prepared for hefty fees and interest penalties. Your credit score will also be dinged almost immediately. The advantage of charge cards is that they prevent the possibility of  overdraft fees.

Winner: Debit Cards

Rewards

For many years debit cards offered no rewards. That's changing. Debit card rewards programs are getting better all the time and some even rival charge card programs. See overview of the best debit card rewards programs. The richest debit cards offer 1% back on purchases.

Charge cards pioneered rewards programs and some of them can be attractive. Amex offers 1% back on the purchase of gifts using their points. Redemption can be higher for certain types of products - groceries, airline tickets, etc.

Winner: Charge Cards

Fees:

Most debit cards are free with a checking account. Charge cards generally have an annual fee which range from $95 - $1,000. Most charge cards come with a first year free.

Winner: Debit Cards

Float:

Since charge cards are in essence providing you a short term loan, in theory you can put that money to work in between your purchase and when the bill comes due. Let's say you puchase $1,000 of goods and services on your card every month. And let's assume you have 15 days betwen the purchase and when you have to pay. That's a 15 day 0% interest loan. How much could you earn. By my calculations, you could earn $.33 on the float (assumes a 1.95% APY savings account). That won't even buy you a pack of gum.

Debit cards give you 0 float. So, I guess charge cards win, although it's a phyrric victory.

The Verdict

If you're looking for the most responsible, cost effective way to purchase goods and services then debit cards are the clear winner. If you want the richest rewards program (especially travel rewards), then charge cards have a slim advantage. Still, with some of the new debit cards rewards programs, that gap is narrowing. Overall, I plan to stick with my debit card.

Don't agree? Share your thoughts and opinions below.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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