How Do Charge Cards Affect Your Credit Score? (2024)

On the surface, charge cards and credit cards look almost the same. Both payment methods are around3.37 by 2.125 inches and generally made of plastic or, in some cases, metal. You use charge cards and credit cards to pay for purchases and repay the card issuer at a later date. And either type of account may give you the opportunity to earn rewards and enjoy additional cardholder perks.

Yet there are some key distinctions between charge cards and credit cards. While both account types will typically show up on your credit reports, they can impact your credit score in very different ways.

The good news is that you have control over how a charge card impacts your credit score, just like you have control over any other credit obligation. So, if you open and manage a charge card responsibly, it has the potential to help you build better credit over time.

Whether you already have a charge card in your wallet or you’re considering applying for your first charge card, it’s a good idea to learn how they work. Read on for a detailed breakdown of charge cards, the best way to manage them and how they may affect your credit score.

How Charge Card Payments Work

You likely won’t notice a difference between a charge card versus a credit card when you swipe it or insert either payment method into a chip reader to pay for a transaction. But when your first charge card statement shows up in your inbox or mailbox, a few features might surprise you if you’ve only used credit cards in the past.

Unlike credit cards, which feature minimum payments and give you the option to roll a portion of your balance over each month, charge card issuers expect you to pay your full statement balance by the due date. It’s a good habit to pay your statement balance in full regardless of whether you’re using a charge card or credit card. However, if you opt to use a charge card, paying in full is typically not optional.

It’s worth noting that certain cards, such as some offered by American Express, might give you the option to pay over time * with interest on some purchases. If you elect to take advantage of such an offer, your charge card bill may behave more like a credit card, especially in terms of interest charges.

Charge Cards and Your Credit Score

FICO scoring models treat charge cards in a different way than credit cards when it comes to the calculation of your credit score. FICO does not factor charge card accounts into your credit utilization ratio. Of course, on-time payments are still a must if you want a charge card to benefit and not hurt your FICO Score®. It’s also wise to avoid closing accounts without good reason as this can decrease your length of credit utilization and in turn hurt your score.

Credit utilization is a major FICO Score factor. It largely accounts for 30% of your FICO Score. So, the fact that FICO doesn’t consider your charge card balances when a scoring model tallies up your credit utilization rate is a big deal.

Wondering how credit utilization works? Here’s a simple definition. Credit utilization is the relationship between your credit card limits and credit card balances. So, if you owe $7,500 on a credit card with a $10,000 limit, your utilization ratio is 75%. As you use more and more of your available credit card limits, your utilization goes up. That can be bad for your credit scores, even if you make your monthly payments on time.

As mentioned, charge card balances don’t affect your credit utilization rate. A $7,500 balance on a charge card wouldn’t have the same impact on your credit score as the credit card in the example above. In fact, using a charge card might indirectly help your FICO Score. Here’s a hypothetical example to illustrate the potential benefit.

Imagine you make a $5,000 charge on your credit card which has a $5,000 limit. The card issuer reports your balance to the three main consumer credit bureaus (Equifax, TransUnion, and Experian) on your statement closing date. Although you pay the balance in full by your due date a few weeks later, your credit report shows that your account is maxed out until the next time the card issuer updates your account. As a result, your credit score might temporarily decline.

Now, let’s say you make the same $5,000 purchase on your charge card instead of your credit card. The charge card issuer reports your balance to the credit bureaus and, as in the other scenario, you pay your full balance by the due date. Yet because the account doesn’t count toward your credit utilization ratio, the high balance does not trigger a temporary credit score drop.

More Differences Between Charge Cards and Credit Cards

As mentioned, charge card issuers require you to pay your full balance each month and FICO scoring models don’t count these balances when they calculate credit utilization. Yet there are still a few other differences you should be aware of where charge cards and credit cards are concerned.

Credit Limits

When you open a credit card account, it comes with a credit limit. Your credit limit is the maximum amount of money you are allowed to spend on the card. It’s a key component that credit scoring models use to calculate your credit utilization ratio. Once you reach your account’s spending threshold, you have to pay back some of the money you’ve borrowed before you can use the card for additional purchases.

Charge cards, on the other hand, do not come with preset spending limits. This is the primary reason why FICO doesn’t factor charge card balances into your credit utilization ratio. Without a reported credit limit, any credit utilization calculation wouldn’t be accurate.

Of course, even though your account may not have an official credit limit, that doesn’t give you the ability to spend an unlimited amount of money. Your account has a “shadow limit” based on your credit rating, income, spending habits and other factors. In short, your charge card issuer retains the right to deny purchases it deems to be too large.

Thankfully, many cards give you the opportunity to check in advance before you attempt to make large purchases to make sure they will be approved. American Express, for example, provides a “Check Your Spending Power” tool you can access via your online account. By taking this step in advance you don’t have to worry about the potentially embarrassing situation of having your purchase denied at checkout.

Annual Fees

Annual fees are common among credit cards and charge cards. While it’s possible to find many credit card options with no annual fee, it’s nearly unheard of to find a charge card without one.

It’s easy to understand why charge card issuers usually charge annual fees. Annual fees are how they make a portion of their profits. With credit cards, issuing banks earn a lot of money in interest when customers revolve outstanding balances from month to month. Because charge card issuers don’t make as much profit where interest fees are concerned, they tend to charge annual fees.

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Is a Charge Card a Good Fit for You?

It’s easy to find credit cards designed for people with no credit, bad credit, excellent credit and everything in between. Yet you generally need a good to excellent credit rating to qualify for most charge cards. Stellar credit is a must if you’re interested in a premium charge card.

Before you apply for a new charge card (or any other type of financing), it’s wise to take a look at your three credit reports and scores. Of course you can check for credit errorsand dispute any mistakes you find. Checking your credit will also give you an idea of the current condition of your credit and whether or not you’re likely to be approved for a charge card.

If you discover that your credit is in good shape, next it’s time to evaluate the cost of the charge cards you are considering versus their benefits. An annual fee of several hundred dollars may seem high, but if you think you’ll be able to take advantage of the benefits it may be well worth that cost. However, if you don’t think you’ll use many of a charge card’s specific benefits, you should probably search for a card that’s a better fit for your spending habits.

Bottom Line

In the end, if you open a charge card, be sure to manage it well. When you use a charge card responsibly, it has the potential to help you improve your credit rating and put you into an even better borrowing position in the future. After all, the lifetime value of a good credit score could save you tens of thousands of dollars, and maybe more.