Guide to Charge Cards

The generous rewards available from charge cards can make them an attractive alternative to conventional credit cards. However, there are reasons why charge cards are less popular than credit cards, and these need to be understood before you can decide whether their benefits compensate for their drawbacks.


History of Charge Cards

Diners Club cardboard card

Although credit cards and debit cards dominate UK payment cards, neither would exist without charge cards.

First issued by Western Union, US department stores and oil companies in the early 1900's, charge cards pre-date credit cards by around 50 years. However, because they were tied to specific retailers, these early charge cards had limited appeal, and it was not until the launch of Diners' Club that they became a mass-market product.

Inspired to simplify payment after forgetting his wallet for an important business dinner, Diners' Club was the brainchild of Frank McNamara. Enrolling over twenty thousand people within two years of launch, Diners' Club proved that the charge card concept was viable. In 1957, American Express followed Diners' Club into the charge card market and became the first issuer to switch from paper/cardboard to embossed plastic cards.

At around the same time in California, Bank of America launched the first credit card. Credit cards differed from charge cards because they offered revolving credit (the choice to pay all of the balance, or just make a minimum payment). The additional flexibility of credit cards impacted the appeal of charge cards, leading charge card issuers to focus on enhancing their reward schemes. This is why today, charge card reward schemes are more generous than equivalent credit card rewards.


How do Charge Cards work?

Modern charge cards facilitate secure electronic payments in the same way that other payment cards do. The big difference between charge and credit cards, is that credit is not available on charge cards. Any spend on the card in the previous billing cycle must be paid in full. Balances cannot be 'rolled on' for later payment.

Unlike credit cards which charge interest on balances, or banks who charge high interest on overdrafts, charge card operators make most of their revenue from the fees they charge users for holding their cards, and merchants for accepting them for payment.


Benefits of Charge Cards

Given their annual fees and payment inflexibility, it is clear that charge cards must offer some valuable benefits to the cardholder, in order to remain desirable.

Woman abroad walking with cycle

Rewards

High merchant fees (charges to retailers for accepting cards) enable charge card operators to operate rewards schemes which are very generous compared to credit cards.

Points are typically earned wherever you use your card (earn rates vary by spend category). Many cards also offer additional bonus points to incentivise spending, and anniversary bonuses to help maintain loyalty. A minimum spend within a set period is usually required to obtain these bonus points.

Once gathered, points can be exchanged for frequent flyer points, hotel reward schemes, and for gift cards with retailers. In some instances, they can also be used directly for payment (or part payment) with online retailers.

Spending

Important to some customers is the flexibility charge cards can offer in spending, as a result of inflexibility regarding payment.

Because they do not offer credit, a 'credit limit' is not set. This does not mean customers can spend without restriction, but assuming spending is within known patterns, and in accordance with their financial circumstances, they have far more freedom than they would with a credit card.

Other perks

Depending on the card, a number of other benefits are also available to charge card holders.

Airport Lounge Access

Many offer their users access to airport lounges. Sometimes access is limited to a set number of visits per year, but some cards offer free, unfettered access.

Free Insurance

Some charge cards offer their holders free family travel insurance when they use their card to book their trip.

Lifestyle Concierge Service

If you are too busy to trawl through websites to book your travel or events, many charge cards offer access to a free telephone lifestyle concierge service which can arrange this for you.

Advanced Access & Preferential Tickets

American Express cardholders can access tickets to many popular shows before their general release. In many instances, Amex cardholders also receive preferential seating and other experience enhancements, like backstage passes.


Disadvantages of Charge Cards

Many of the disadvantages charge cards are caused by the very elements that facilitate their benefits. However, depending on the way you use the card, charge cards can have disadvantages when compared to credit cards.

No Credit

Charge card users cannot benefit from the 0% introductory deals some credit cards offer on balance transfers and/or purchases since revolving credit is not available.

Payment must be made in full regardless of your circumstances at the time, and failure will result in a missed payment fee and is recorded in your credit file (making it harder to access further credit).

Harder Applications

Charge cards can also impede you from accessing other credit lines since, with no defined credit limit, suppliers are unable to fully understand your financial exposure.

Limited Availability

Regardless of willingness and ability to pay, charge card acceptance is restricted to individuals with high incomes and a good credit score.

Annual Fees

Charge cards tend to charge users an annual fee, so you need to be sure that the benefit you receive from holding the card offsets this. With higher annual fees, this can mean you need to spend a considerable on your card.

Reduced Purchase Protection

Spending on charge cards does not enjoy the same statutory consumer protection that credit card users enjoy (Section 75). Neither do charge card issuers offer a charge-back scheme whereby customers can claim refunds, but this is discretionary.

Airplane

Cash Withdrawals

Unless requested, cash withdrawals are not typically available on charge cards. Where card holders have requested ATM functionality, they will find that withdrawals are very expensive. A cash advance fee of around 3% is immediately incurred, and a prohibitive interest rate (usually over 40% APR) is charged after that, meaning a £100 cash withdrawal would cost around £110 if made at the start of a billing cycle.


Who are Charge Cards best suited to?

Charge cards are best suited to people or businesses with high incomes, who use payment cards regularly and can ensure they never miss a payment.

Given the nature of many of the rewards, charge cards are most likely to benefit to people who frequently travel.


Which UK issuers offer Charge Cards?

The market for charge cards in the UK is far smaller than the credit card market. As such, choice of card and issuer is far more limited. Use our dedicated charge card table to find and compare the best charge card products currently available.


Comments or suggestions about this tool? Send us feedback