Though they are often mistakenly interchanged, there are some significant differences between credit cards and charge cards. Unlike credit cards, charge cards don’t have preset spending limits. The idea of a limitless card may sound dangerous, but since the balance must be paid in full at the end of each month, cardholders are encouraged to think twice before embarking on any shopping sprees. Plus, a card issuer can always cancel the card if they decide you’re too risky.
So how should our friends at Fair Isaac factor a charge card into your credit score? You (hopefully) never carry a balance month-to-month, and since your credit limit is technically infinite, your debt-to-credit limit ratio is zero to infinity. FICO doesn’t waste time with abstract numbers, of course, so we’re left with the question: How does a charge card affect your credit score?
Does a charge card influence your credit score?
According to FICO, the percentage of your open credit lines in use, or your debt utilization ratio, makes up 30% of your credit score. So if you had an $8,000 limit with a $2,000 balance, your utilization ratio would be 25%. A lower debt-to-credit limit ratio translates a better credit score because it shows that you can avoid maxing out when trusted with a good amount of credit. Unfortunately, figuring out the debt utilization ratio on a card with no limit and no balance makes it a little difficult to determine how charge cards affect your credit score.
Allow us fill you in.
Charge card issuers report your highest balance to date, or a “high limit,” instead of your credit limit. They also report the credit line as “open” as opposed to a “revolving” credit line, which has no fixed number of payments. If a credit bureau sees an open account with a high limit instead of a credit limit, they know they’re looking at a charge card. They then disregard the information, so charge cards have no impact, positive or negative, on your credit score.
So what’s the benefit?
Before you write off charge cards as limited lines of credit that don’t help your utilization ratio, consider the cards’ other effects. Over time, having the account bumps up the average length of your credit lines and payment history (that is, if you’ve been keeping up), which adds up to 50% of your overall credit score. If your only goal is to maintain your credit score and keep low balances, a revolving card may be the best credit card for you.
But it really all just comes down to whether or not you are a responsible cardholder. A charge card can be costly if you carry a balance: some charge $35 if you’re late, or worse, 2.99% of the balance. That translates to an APR of over 35% – far worse than most credit cards. If there’s a chance you won’t be able to pay off the debt on your charge card in a month, you should look for a low interest rate credit card instead. Charge or credit, no card can replace keeping a keen eye on your budget and practicing good, old fashioned, smart spending habits.