Charge Cards: Better Than Debit and Credit Cards, or a Waste of Money?

In 2013, the average cardholder had 4.1 credit cards but only 0.1 charge cards, according to the Federal Reserve Bank of Boston.

Clearly, most Americans are not clued in when it comes to charge cards. It makes you wonder whether they're missing out -- or whether charge cards just aren't worth it.

Charge cards vs. credit cards vs. debit cards

Does It Build Credit? Does It Offer Fraud Protection? Does It Offer Purchase Protection? Does It Charge Interest? Is There an Annual Fee? Does It Offer Rewards?
Debit cards No Sometimes No No No No
Credit cards Yes Yes Yes Yes Sometimes Sometimes
Charge cards Yes Yes Yes No Usually Yes

Charge cards are like a hybrid of debit cards and credit cards. Overall, charge cards are comparable to credit cards, except that charge cards have to be paid off in full each month, whereas credit cards don't.

Charge cards also offer the superior protection that makes credit preferable to debit in many circumstances. Credit cards and charge cards are required by law to limit consumer liability to $50, and most come with zero fraud liability. That means that if you flag a fraudulent charge on your credit or charge card, the most you could possibly be required to pay is $50. Debit cards have no such requirements when it comes to consumer liability, although there are some ways to protect yourself against fraud while using a debit card.

As with a debit card, you cannot carry a balance on a charge card. However, unlike a debit card, a charge card does not need to be pre-loaded with your own money. Instead, charge cards extend credit to you, which is why they help build credit, but you only get that credit until your statement comes at the end of the month.

While you can easily find credit cards with no annual fee, most charge cards do charge an annual fee that can range from $25 to $500. Sometimes that annual fee is waived the first year.

Both credit cards and charge cards offer rewards. Charge cards are typically associated with American Express (NYSE: AXP), so you'll likely be earning American Express Membership Rewards with them. Credit cards, on the other hand, are offered by multiple different issuers and come with a huge variety of rewards programs to choose from.

Is a charge card right for you?

Here are some common reasons why people get charge cards that are questionable at best:

  • You want to build credit
  • You are practicing financial responsibility
  • You want the benefits of a credit card

For those who are trying to build credit, a credit card with a low limit will do the trick. Even with a low credit score, you can even find secured credit cards that are specifically designed to help build credit.

If it's financial irresponsibility you're worried about, then a charge card might be even more dangerous than a credit card, as it has no pre-set spending limit. While you can't carry a balance on a charge card, nothing is stopping you from racking up more charges than you can afford to pay off in a month. If you do that on a credit card, you pay interest on the balance until it's paid off. But with a charge card, if you can't pay off your balance in full every single month, you'll be hit with an interest rate that's even higher than a credit card's, along with late fees and a decreased credit score.

Instead, either stick to debit cards until you can trust yourself or ask your credit card issuer to lower your credit limit. Keep in mind that this will bring your credit score down, but it might be worth it if you can't control your spending.

Fraud protection and purchase protection are important features, but they're offered by credit cards, many of which provide these benefits with no annual fee. If it's rewards you're after, credit cards with and without annual fees have some fantastic rewards programs.

On the flip side, here are some legitimately good reasons to get a charge card:

  • You're trying to accumulate American Express Membership Rewards
  • You're a frequent traveler who enjoys luxury
  • You spend a lot each month but always pay off your balance in full

One last perk unique to charge cards is that, as mentioned, they have no pre-set spending limit -- and of course, this is only a perk if you use it responsibly. This doesn't mean you can charge an unlimited amount of money to a charge card, but it does often mean you can spend more than a credit card would allow, given its fixed spending limit. This is especially true if you have excellent credit and a high income. That means charge cards are also a great solution if you find yourself regularly maxing out your credit cards but you always pay the balance in full.

There are some financial situations in which a charge card can come in handy. However, for the average person, a smart combination of debit and credit cards works just fine.

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Elizabeth Aldrich has no position in any of the stocks mentioned. The Motley Fool recommends American Express. The Motley Fool has a disclosure policy.