The terms “charge card” and “credit card” seem to be interchangeable. After all, both cards can be pulled out of your wallet and plunked down to purchase just about anything you feel you can afford. Both will show up on your credit report and both will have an impact on your credit score.
While a charge card is very similar to a regular credit card, these cards work differently in two very distinct ways. Here we will discuss what a charge card is and whether or not it can help your credit score.
What is a charge card?
A charge card and credit card work the same when it comes to making purchases. However, there are few differences to keep in mind when comparing the two cards.
First, there is no preset spending limit. When you are approved for a credit card, you are assigned a credit limit that you are unable to exceed. Charge cards allow for more buying power because there is no preset spending limit. However, this doesn’t mean spending is unlimited. Your spending capacity is adjusted every month based on your history as a cardholder.
Second, the balance is due in full every month. So, you will need to be sure you can afford to pay off whatever you charged to the card by the end of the month. If you don’t, you will likely face interest and other charges. You might even have the card revoked. These cards do charge an annual fee, and sometimes it is substantial since they don’t make money on interest charged on a revolving balance.
American Express has stopped using the term “charge card” for many of their personal rewards credit cards, but they do still offer cards with no preset limit. You can choose to pay your bill in full each month or take advantage of one of their options for payment over a longer time period with interest. These American Express credit cards do come with a high annual fee. But many credit cards with set limits also charge an annual, so it just depends on what you are looking for.
How do charge cards affect credit utilization?
Because these cards don’t have a preset limit, they will not impact your credit utilization ratio (how much of your credit limit you use). But the card will still impact your credit score in other ways—including whether you pay your bill on time.
This can be good news if you use a charge card for a large purchase. If you were to put a very large purchase on a credit card that might put you close to your individual card credit limit, you’d risk dinging your credit until the account is paid down below 30 percent, at least. But putting the same amount on a charge card would not directly affect your individual card utilization percentage.
A word of caution, here: Even though you do not have an official preset limit, that does not mean that you can spend as much as you’d like. The companies that still issue charge cards do keep track of your spending habits and have an idea of how much is too much. You could have your purchase declined if you go too far. The best way to avoid that is to check with the card issuer before making a large purchase.
Is a charge card better for your credit?
Using a charge card can be great for your credit if you are responsible. Remember that payment history is the most important factor in your FICO credit score and moderately influential to your VantageScore. Paying your bill on time, every time will help your score. And unlike most rent payments, utility, cable and cellphone bills (all of which must be paid in full like an installment loan), charge cards are regularly reported to the credit bureaus, and your good payment history will show up. So, paying your bill on time will help your score whether you use a charge card or a credit card.
The bottom line
Figuring out what kind of card you need is a personal choice. Some charge cards offer excellent rewards, and depending on how you plan to use the card, rewards offerings should certainly factor into your decision. You should know, though, that the spending and payment options for a true charge card are somewhat limited—especially when compared to credit card options.
Credit cards also offer some great rewards. But if you make a large purchase that puts you close to your limit, your credit could take a hit. But this risk is also time-limited, depending on how long it takes you to pay the purchase off. If you only go one billing cycle, the effect will be minimal and short-lived. So, the choice is yours—make the most of it.