Pay More for Less at American Express

Investing was actually my second career. For the six years between college and B-school I wrote software. Back then, we Dilberts had a phrase we used to parody the marketing types who sold what we made. "It’s not a bug, it’s a feature!" In other words, that obvious flaw in the software is not, in fact, a mistake that makes it less useful, it is a brilliant design decision that actually makes it better and worth more to you, the customer.

I also, at this time, had an American Express card, paying, I think, $50 or $75 a year for the privilege. I honestly forget why. I think I got it while still in college under some kind of special deal. And there was this store I frequented that in those days only took Amex. Anyway, by the time I was 25 I came to my senses and cancelled the thing. They sent me a nice letter saying that if I ever came back I could still have a card that said "Member Since 1986".

So I’ve got that going for me.

I was reminded of both these things from my past by a brilliant new marketing campaign from American Express. For those of you not familiar with such things, let me explain that the conventional Amex card is not a credit card but a charge card. That is, they do not provide credit for longer than it takes them to send you a bill. You are expected to pay the full balance every month.

I hate to say this about a fine old American company, but it is not clear to me why American Express still exists. The travelers checks and even the travel agency businesses are selling buggy whips. And who would want the charge card? It costs more than a Visa/MC, is accepted at fewer places, and comes without the option of not paying your bill in full, should the need arise.

Silly me. That lack of a line of credit isn’t a bug, it’s a feature. You see, with a credit card you might run up a balance, and that is bad. With a charge card that won’t happen. So it’s worth paying more for.

How much more? As it turns out, $25. That’s the annual fee on the new Zync(SM) card that Amex is flogging to young people. "Customizable like your playlist." Apparently, having run out of precious metals to name cards after, Amex has been reduced to misspelling non-precious metals. The card seems to be a very pale blue on their website.

Alternatively, a person could sign up for the Blue from American Express® which is accepted at exactly the same places as Zync(SM), has the same rewards program, and the same extended warranties and other assorted benefits of questionable value. The big difference being that Blue is a credit card, meaning you will have the burden of being able to carry a balance from month to month. On the plus side, there is no fee.

I have already admitted here that there is something, maybe many things, I just don’t get about cards. But really now. Isn’t this just a little nuts? Isn’t it like the used car dealer who tries to sell a car that can’t go over 65 by pointing out all the money you will save on speeding tickets? Not being able to borrow money is a feature? That you should pay more for? Really?

[Photo: Andres Rueda]

Credit Cards | Frank Curmudgeon | December 9, 2009 12:59 pm

20 Comments

By Jim, December 9, 2009 @ 1:45 pm

I can see the appeal of a charge card for some people. Some people either have problems controling their spending or just don’t like credit so a charge card would be a convenient way to pay for items yet not have debt. But I can’t see why people would chose to pay for that convenience when they could just get a debit card instead.
By Dasha, December 9, 2009 @ 2:20 pm

Agreed. I can see why someone would prefer a charge card (like if they have no discipline) but paying for one? That’s just crazy.
By chris, December 9, 2009 @ 2:33 pm

Many people get these cards for the rewards programs and the double warranty coverage, myself included.

Now, this Onyx card just sounds ridiculous, and is clearly targeted at a younger demographic that doesn’t know any better. But a regular Amex charge card, for people who put most of their monthly expenses on it and pay their balance in full every month, easily pays for the cost of the card with the rewards you earn.

A minor nitpick with the content: Amex now allows you pay charges over time, albeit with a higher interest rate than you would probably get with a conventional credit card.
By kitty, December 9, 2009 @ 3:09 pm

I’d imagine charge cards are still useful for corporate accounts. I think a corporation likes more that the employees get nasty notices with copies to management if the account is not paid rather than some huge balances. And for a large corporation, the annual fee is peanuts.

At least my corporation – a Fortune 500, IT corporation – still uses AmEx corporate charge cards for business travel. Mine was cancelled for inactivity recently…. haven’t traveled in a while, no travel plans in near future and haven’t bothered to buy a $10 item every year.

Similarly, large corporations still use AmEx for business travel (as far as I know…)
By kitty, December 9, 2009 @ 3:10 pm

“Similarly, large corporations still use AmEx for business travel (as far as I know…)”
I meant AmEx travel business for business travel arrangement – hotels, air, etc.
By DanT, December 9, 2009 @ 3:17 pm

I never saw the point of having an Amex card either, for the same reasons you gave, Frank.
But I have one now. We already had a Costco membership, and they offer a “free” rewards card as long as you’re a Costco member. If we ever drop the Costco membership, then the card has a $50 annual fee. But the card also has the best overall rewards, so we use it for almost everything. And pay it off in full each month, of course. We use the Discover card for whatever categories are giving 5% cashback rewards on that quarter, and a Visa rewards card for places that don’t take Amex.

That said, if we ever decide to drop our Costco membership, we’ll cancel the Amex too. I’ll admit I haven’t done the math, but I don’t think the rewards are worth $50/yr more than the rewards on our other cards.
By Neil, December 9, 2009 @ 4:04 pm

For a certain subset of people, the answer is “yes.” There’s going to be a group of people in existence who have need that psychological knowledge that they HAVE to pay for what they bought in order to only spend what they can afford. And if you’re part of that group, it probably is worth $25/year. It doesn’t take many partial payments on a credit card to cost you that much in interest, plus the cost of the stuff that you didn’t really need but bought anyway.

Of course, there’s going to be the larger group who will overspend either way because the card won’t get rejected just because you can’t afford to pay the bill. I’m not sure what happens if you fail to pay a charge card bill in full…I’m going to guess the penalty fees are higher than credit card interest. So the Zync would be a terrible deal for this group.

And then there’s the third group that you and I are part of. The group that takes the rewards and low cost of the credit card, and consistently pay in the grace period anyway, making the bank our bitch.
By CalLadyQED, December 9, 2009 @ 5:05 pm

I suppose that a few people who won’t use credit cards for moral reasons may find charge cards acceptable. (I thougth the two names were synonymous. Learn something new every day.)

I think may tell us something interesting about the credit industry, though. Sometimes suppliers charge more because they can (due to demand). Sometimes they charge more because they must (due to supply). Are charge cards more expensive than credit cards? Why not? Getting your money back within a month right away may be good business, but what if AmEx gets more money from squeezing those who don’t pay their credit cards bills in full? That’s great business.

Btw, presumably you’re paying for the convenience on not having to carry cash or deal with personal checks. Are you paying for that in an annual fee or in temptation?
By Erik, December 9, 2009 @ 9:28 pm

I think you are missing one important point. I am an Amex user for personal and corporate expenses.

Another difference is that the “credit card” business model plans to extract fees from the card holders. Amex has a pay by date but if you are a few days late there is no late fee plus amortized interest. It is a different relationship that is much more professional. If my company is a bit late paying my expense report, I can pay the card a bit late and they have never bothered me. Granted, I don’t abuse this and it doesn’t often come up but I like this flexibiity and I am willing to pay $50 to support a business model that treats me as a proper customer.
By Craig, December 10, 2009 @ 10:32 am

I carry an Amex _credit_ card, co-branded with Delta Airlines, because the annual membership fee of 50 bucks gets me a plane ticket to Europe every 24 months or so. So that seems like a pretty workable deal. Absent that, I wouldn’t bother.
By TFB, December 11, 2009 @ 1:45 am

Consumers have spoken with their actions. They are willing to pay to have someone else help enforce discipline. They give up rewards by using debit cards. If you use that as a starting point, paying a $25 annual fee for the rewards is well worth it. Both a charge card and a debit don’t let them go into debt. They are better off using a charge card than using a debit card. Yes, having a dangerous option removed is a feature, just like people pay to have an electrician come and fix an exposed live wire when they have the option of not touching it.
By s2kreno, December 16, 2009 @ 3:13 pm

I had an Amex gold card until I noticed that the company was putting unauthorized charges on itds own card–$249 for insurance that I never requested, a $24 subscription for Travel and Leisure, etc. I shouldn’t have to scrutinize my bill for rip-offs perpetrated by my own card company, jeez.
By Lilli, December 23, 2009 @ 7:23 pm

People are also overlooking that holding an American Express card boosts your credit rating because it’s more difficult to qualify for a card. That alone makes the annual fee worth it in my book. I remember being in college and taking my father to dinner on his birthday and when he saw me pay with my AmEx he was shocked and said “what is that?! I can’t even get one of those because they won’t approve me!” (thank you momma for being my financial role model lol).

I also use my AmEx card for pretty much everything. Having to pay in full each month keeps me from overspending, but it gives me a grace period if I’m short on cash one week (as opposed to a debit card). Plus, in my case, the rewards I get always more than cover the annual fee.
By Frank Curmudgeon, December 25, 2009 @ 10:45 am

Ah yes, the prestige factor. If it impresses your dad or your date, then Amex is worth it. But it’s just another card as far as your credit score goes. In fact, since there is no credit line attached, I think it may be less useful in terms of building a high rating.
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