Taking a break from Credit vs. Charge Cards, I want to touch on the choice between credit and debit cards.  You would have trouble opening a bank account without receiving an ATM card that doubles as a Debit card.    Typically, these cards are accepted anywhere a Visa is.

The USA Today, recently posted a rundown of the distinctions between credit and debit cards with a style that recalls their usual talent for distilling subtle distinctions into colorful bar graphs.

The article begins by pointing out that there were actually more debit card transactions last year than there were with credit cards.     The author offers many possible explanations from the failing economy to the preferences of the younger generation.       I think a lot of people have had it with their credit card company and they see debit cards as a better way to go, but there is also more to it.

Here is my take on some of their advice regarding debit cards:

They say that: “Make sure the funds are there. A $6 sandwich can wind up costing $46 if you don’t realize your checking account is flat-lining. Most merchants no longer reject a card if you have an inadequate balance; instead, you incur a hefty overdraft fee.”    This is true, but you also must add up the interest that you might be paying on your credit card if you carry a balance.   The interest can be massive if you carry a balance, as it occurs from the moment you make the transaction.   Worse yet, with double cycle billing, you end up paying interest even after you pay for something.    Fortunately, this practice will be outlawed when the CARD act goes fully into effect in February.

They also mention that “A security breach could mean trouble.” What this means is that charges that go through on your debit card, for better or worse,  is like cash coming out of you bank account in real time.    If you card is stolen, you have a good chance of coming out of it without much harm.  Unfortunately, if the goods or services you purchased are not delivered, you are essentially in the same position you would be if you had paid cash.    There are no charge backs with debit cards like there are with credit cards.

They bring up the subject of Usage Fees.    Apparently some debit cards charge you a fee for each use.   Run, don’t walk, if someone offers you such a card.

The article also brings up the subject of account blocks.   I can’t tell you how many consumer complaints I have read about a hotel or rental car company freezing a cardholder’s funds with an account block.     Do not ever rent a car or stay at a hotel with a debit card.   A huge chunk of your bank account will be frozen faster than a Colombian drug lord, only to be released at some unknown later date when the hotel or rental car company feels like it.   Should they decide that you touched the minibar or left a scratch on the bumper, and you will never see your money again.     At least with a credit card, the burden of proof is on them.

What About Credit Cards?

They touch on the usual litany of possible expenses such as late fees and interest charges, no surprises there.

They point out that credit cards can “They tempt you to more than you can afford.” and to “Be careful with rewards” as they also can encourage overspending.      Now we are down to the meat of the matter, and it is not that different than the Charge Card vs. Credit Card debate.     The difference is the psychology of the cardholder.     In one case, you have debit cards that have few if any of the features of credit cards such as charge backs and interest free float, yet people are tempted to purchase more than what they can afford to pay off, thus incurring interest and/or late fees.    On the other hand, debit cards lack those  features, have greater security risks, an can even result in your funds being frozen when you are traveling.    Nevertheless, people like debit cards as it is a financial device that allows them to control their spending.

Where I Stand

I am not a debit card fan.    One reason is rewards.   Yes, there are some reward debit cards, but their programs are shadow of what you find with a good reward credit card. I can recall using them at Costco, long ago before they accepted Amex (or perhaps when I didn’t have an Amex, I can’t remember).   I have also used them overseas to avoid foreign transaction fees.    Other than that, I don’t see any need to ever use my debit card.

Because debit cards lack many of the features and consumer safeguards of credit cards, they also cost both the banks and the merchants less when you use them.   Another big expense for the banks is rewards.   In realizing these additional costs for credit transactions, banks are increasingly promoting debit transactions in order to increase their profits.    For me, those efforts fall on deaf ears as I prefer paying my credit card balance in full and reaping rewards.   For others, debit cards offer a stress free way to stay out of debt.

To each his own.

Are there any distinctions between the annual fees or other fees on credit cards vs. Charge cards?

Every card has a price, and we are upfront about ours.  Take our Green Card for example. For only $8 a month, less than a movie ticket, you get:
•    The ideal payment tool for people who want control of their finances
•    Rich rewards you can use with no expiration, cap or black out dates,
•    Access to everything from a hot concert to the local theatre
•    Exceptional customer service

Plus having the American Express Card in your wallet is like carrying around a security blanket: your purchases are protected and we are there for you when you are traveling.

We’re also attaching some fact sheets that show the different Charge Cards we offer and the benefits and services that come with each one.

What reward programs are associated with Amex’s Charge card offerings?   How do they differ from the reward card offerings on the credit card products?

Amex: Every Charge Card comes with the Membership Rewards program. The program allows Charge Cardmembers to earn one point for virtually every dollar charged on eligible purchases and provides Cardmembers lots of opportunities to earn double, triple and even up to 10x bonus points on purchases.

With more than 500 partner brands, the program literally offers rewards choices from A to Z—Cardmembers can redeem for everything from an Apple computer to a trip to the zoo.   The rewards options range from the outrageous to the ordinary, meaning you can use points to treat your family to a fancy vacation or for everyday necessities, such as gas cards to fill up the tank or gift cards at merchants like Gap and Old Navy for back-to-school shopping.  The program puts rewards within reach for all types of Cardmembers.

The program is designed to offer Cardmembers rewards that are the most relevant to their lifestyles, which is why partners include some of the best brands and companies that Cardmembers frequent in order to shop, dine and travel. And unlike some programs, Membership Rewards points have no expiration date, and there is no limit on the number of points a Cardmember can earn.

In addition to earning one point for virtually every dollar charged on eligible purchases, Charge Cardmembers have plenty of opportunities to make their spending even more rewarding. And now through March 15, 2010, Charge Cardmembers can earn double points on U.S. standalone gas and grocery purchases up to $1000 dollars of eligible spend each month. To take advantage of the offer, Cardmembers must enroll their existing Charge Cards.

In terms of other rewards programs, American Express offers a variety of products because consumers want choice – we don’t have a one-size-fits-all philosophy.  We have a broad and diverse set of consumer card products and services, including charge cards, credit cards, reward cards and co-brand cards.  All American Express Charge and Credit Cards offer a number of core benefits and services, at no extra cost, as part of the value of being a Cardmember.  Cardmembers also have access to a wide array of rewards, unique experiences and world-class customer service.  Each product offers a different level of travel, entertainment and lifestyle benefits.

My Thoughts

The Charge Card is an old product, and is the fore-bearer of the credit card that we all hold.    The distinction seem to be philosophical and psychological.    It is philosophical in that the card is designed to be paid off in full every month.   This is the foundation of my personal philosophy with regards to charge/credit cards.    And yet, I do not have a charge card among my American Express cards.    It is not that I plan on carrying a balance ever, it’s just that I still fail to see the point.  My favorite Amex remains the Starwood Amex and the Business Platinum which gives me 5% off of gas, for now.   Neither are charge cards, yet I am, of course, free to pay off their balance in full every month.

The psychological difference is the key.   For many, the temptation not pay their balance in full is strong, and the option to incur interest is just too tempting.   Amex keeps referring to their Charge Cards as a “smarter way” to pay.   I am not so sure.   In my view, this is primarily an advantage for customers who need the sense of obligation and the penalties of default to ensure they consistently do the smartest thing, pay their balance in full every month.

In Conclusion

It is good to have a contact at Amex to ask questions, and I did not get any surprises this time around.   I am now trying to speak with someone about their Financial Review process, a subject that I know that many readers would like to have some light shed on.   I hope things get more interesting in the future, and I am willing to direct your questions (not specific to your account)  to Amex as appropriate.

What would you like me to ask them?

A few weeks ago, I attempted to answer the question, What Is A Charge Card? Since then, I have heard from an American Express spokesperson regarding chargecards.  They gave me an opportunity to ask them some questions about this and other subjects.    While there doesn’t seem to be anything inaccurate in my assessment, I thought it would be nice to learn a bit more about charge cards as opposed to credit cards.

Part 1 is today, Part 2 and my comments are tomorrow.

What is the history of American Express’s Charge cards?

Amex: In 1958, American Express launched the American Express Charge Card – a natural product addition for the company that had already established itself as a leader in offering travel and financial services, including Travelers Cheques and money orders to customers worldwide.  The American Express Charge Card was yet another way for the company to provide outstanding customer service to consumers with an affluent lifestyle that included traveling and entertaining.
The Charge Card immediately resonated with its audience.  By the end of 1958, the American Express Charge Card was accepted at an estimated 30,000 establishments worldwide and was in the hands of 500,000 customers. There are currently approximately 12,000 charter Cardmembers who have carried the American Express Charge Card for fifty-one years, joining millions of other people who now carry one of the many American Express Cards available.
American Express’ original Charge Card was made of paper, not plastic; was purple in color to be consistent with the design of the American Express Travelers Cheque; and had an annual fee of $6 to position the card as a premium product.  In 1959, American Express introduced an embossed plastic card, an industry first, to better withstand day-to-day use and speed processing at the point-of-sale.

Does Amex claim any “firsts” in the industry?   Do they hold the largest share of the charge card market in the US?

Amex: As far as we know, American Express is the only one that we know that offer charge cards. American Express has continued to evolve the Charge Card over the past 51 years and has launched innovative Cards, benefits and services to cater to the changing needs of its Cardmembers, including:
•    1963: Introduced American Express Cards in local currency outside North America
•    1965: First to limit Cardmember liability against fraudulent Card use, which is later enacted as a federal consumer protection law
•    1966: Launched Corporate Card program to target corporate customers
•    1969 Colored the Card green, instead of purple, to resemble the color of the US dollar
•    1972: First to introduce the magnetic stripe on payment cards
•    1978: First to launch Emergency Card Replacement
•    1982: Pioneered toll-free, 24-hour customer service
•    1984: Introduced the Platinum Card, the first of its kind, establishing the premium card market
•    1986: First to launch Buyers Assurance, a Card benefit that extends manufacturer warranties
•    1987: Launched American Express’ first revolving credit card and formed the Small Business Partnership, which offered small companies financial management tools, information and resources, the company’s first formal initiative to target the small business market.
•    1991: Introduced Membership Miles, the company’s first loyalty program, that later was expanded and renamed Membership Rewards
•    1995: Launched American Express’ first co-branded card with Hilton
•    2003: Invented clear card technology that is currently used for Blue for American Express, Blue Cash from American Express and several other American Express Cards
•    2005: First to rollout contactless payments on a national basis with ExpressPay on the Blue from American Express Card

Most people understand the distinction between a credit card and a charge card as follows; a credit card holder has the option of paying a balance over time, while a charge card does not.   Is that accurate, or is there more?

Amex: Charge Cards are an alternative to cash, debit and credit cards and are a smarter way to pay.  You stay out of debt because you have to pay off your balance in full every month, there are no interest charges, and you can build your credit history.  Plus you earn great rewards for every dollar you spend.  For those consumers who are looking to get in control of their finances and stay out of debt, Charge Card is the smarter option.

For those consumers who would rather pay their balance over time, American Express offers a variety of products because consumers want choice – we don’t have a one-size-fits-all philosophy.

Charge cards are marketed towards people who pay their balance in full every month.  Obviously, you can do that with credit cards as well.    What are the advantages of a charge card?

Amex: With a credit card, it can be tempting for consumers to spend beyond their means because they just pay off a portion of their bill each month and then find themselves paying interest on their revolving balance.

Cardmembers are encouraged to spend within their means and know to pay their bill in full each month. The Charge Card is the smarter way to pay because it allows Cardmembers to be in control of their spending while also getting real rewards, services and protections.

Stay Tuned For Part 2 Tomorrow