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. But there are significant differences between the two.
What is a charge card?
The first modern charge card came about when a man named Frank McNamara went to dinner in 1949 and forgot his wallet (fortunately, his wife was able to come and take care of the bill). This was, of course, a very embarrassing situation for McNamara and one that he vowed would not happen to him again. He would return to that same restaurant in February of the next year with his idea for the Diners Club card and thus usher in the first modern, multi-purpose charge card. There were 20,000 Diners Club cardholders by 1951. American Express followed in 1958 and within five years had 1 million cards in circulation, outpacing Diners Club in popularity in pretty short order.
These cards work differently from credit cards in two very distinct ways. First, there is no preset spending limit. 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 rate (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 cell phone 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!