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.

Editorial Disclosure: Opinions expressed here are those of the author, and have not been reviewed, approved or otherwise endorsed by any bank advertiser, card issuer, airline or hotel.

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JP Morgan Raises the Credit Card Reward Stake by Offering 100,000 Miles

JP Morgan Chase has recently begun touting a new program offering new customers 100,000 airline miles.

JP Morgan Chase has recently begun touting a new program offering new customers 100,000 airline miles, intensifying the battle for affluent spenders.

The miles, worth more than a round-trip transatlantic flight, will be awarded to customers who spend $2,000 on the co-branded British Airways Signature Visa cards within the first three months, according to their statement.   Customers spending at least $30,000 in the first year will receive a matching travel voucher for a companion to fly British Airways and card holders will earn 1.25 miles for each dollar spent, according to the statement. There’s a $75 annual fee.

While British Airways isn't the most convenient airline for Americans travelling anywhere other than London these days (as anyone who has ever tried to connect onwards to another flight at Heathrow is well aware), frequent flier members can get tickets on several OneWorld partner airlines, including American and Cathay Pacific.  Iberia, the Spanish carrier which is due to be acquired by British in 2010 or 2011, is also already a member of the OneWorld Partnership.

Bottom Line: Something to look into if you are planning to spend a lot this holiday season and want reward miles.

Editorial Disclosure: Opinions expressed here are those of the author, and have not been reviewed, approved or otherwise endorsed by any bank advertiser, card issuer, airline or hotel.

Advertising Disclosure: This site may be compensated for hosting offers.


A step in the wrong direction

Here are some common things people do to hurt their score and what you should do as an alternative.

You have probably read a lot about what you can do to help your credit score recover, but here are five ways to kill your once stellar score.
Forget to put the check in the mail. You’re on vacation now, laying on the deck of your yacht when you suddenly remember you forgot to put the American Express payment in the mail. You could do nothing, and forget about it until our back from vacation. On the other hand, many companies forgive a onetime blunder as long as you bring your account current in a reasonable time. You just may have dodged that thirty day late bullet by making a five minute phone call.
Spend up to your credit limit. It seems this is getting less and less popular as time goes by. Now card companies are recommending you spend only ten percent of your limit, and thirty max. That’s a long way from the fifty percent we were once told. The measure of debt to your credit card limits accounts for thirty percent of your credit score.
Got any credit cards you are not using much anymore?  Go ahead and throw those out; NOT. Length of time accounts for fifteen percent of your credit score so you would do well to keep those cards you have had forever and use those rather than getting new cards.
Get a better card, then a better one and then a really great one. There are a multitude of new cards out there competing for space in your wallet but it is better to stick with the ones already in there. Lenders are a jealous breed and check to see if you have been out and about, applying for new cards. That will account for ten percent of your score. Just don’t do it.
Want to boost your score? Borrow more money, get more cards, and open other kinds of accounts. Well first of all, never borrow just to make your score better, and don’t believe anyone who tells you you have to keep a balance on a card to reap the benefits. Whenever you apply for credit you will notice your score take a hit. Having a number of different types of debt can be a good thing though. Those with stellar credit are ones who have proven they can manage different kinds of debt, like car loans, mortgage payment, and credit cards.
There you have it, a brief overview regarding your credit, what not to do and what to do. There are much more to it than this but it’s a good place to start.
Good luck and happy borrow ring.
 
 
 
 
 
 

Editorial Disclosure: Opinions expressed here are those of the author, and have not been reviewed, approved or otherwise endorsed by any bank advertiser, card issuer, airline or hotel.

Advertising Disclosure: This site may be compensated for hosting offers.