How Will a Charge Card Affect My Credit Score?

If you’re weighing your options and comparing charge cards vs credit cards, you should know that charge cards function a bit differently than standard credit, in that you are required to pay your bill off each month; there’s no revolving credit line.  Charge cards also generally have no pre-set spending limits, so there’s no official concept of a “credit limit”.  Instead the company just decides whether to approve or deny your expenditures in real-time, based on a number of proprietary credit risk measures.  So if you can’t carry a balance, and you don’t have a credit limit, what does this mean for your credit score?

According to FICO, 30% of your credit score depends on your debt utilization ratio, or the percentage of your open credit lines that are actually being used.  For example, if you have a credit card with a $5,000 limit and you have a $1,000 balance, then your utilization ratio would be 20%.  The lower this ratio, the better it is for your credit score, since it shows creditors that others are willing to offer you plenty of credit, and you haven’t gone crazy maxing it out.

The problem is, it’s not initially clear how a charge card should affect your credit score.  What’s the debt utilization ratio on a card with no limit and no balance?  Is it 0%?  Is it 100%? Neither. The way charge card issuers handle it is that they report a “high limit”, which is your highest balance to-date, rather than a credit limit, and they report the credit line as “open” rather than “revolving” (not to be confused with “active” vs “inactive”). When credit bureaus see open accounts with high limits instead of credit limits, they simply don’t include them in their debt utilization ratios, so they have neither a negative nor positive impact on your score.

That’s not to say they don’t do anything for you.  Having the credit account does help your credit score over time because it increases the average length of your credit lines, as well as your payment history (assuming you pay on time!), which combined make up 50% of your credit score. If all you care about is your credit score and you keep your balances low, you might be better off with a revolving card, but at the end of the day the most important piece of your credit score is whether or not you are responsible with your cards. Whether you have a credit card or a charge card is a technicality.

What charge cards are worth considering?

American Express is the only general-use card issuer that is still offering charge cards to consumers now that Diners Club no longer accepts new applicants in the US. The most useful is the Amex Premier Rewards Gold Card, with much better rewards than the Green Card, and a much lower annual fee than the Platinum Card.

American Express® Premier Rewards Gold Card
	Membership Rewards® bonus: 25K points, redeemable for select gift cards valued at $250, when you spend $2,000 in your first three months of card membership. Membership Rewards#&174; points multiply fast! Earn 3X points on airfare, 2X points on gas and groceries, 1X points on everything else. Exclusive access to Gold Card Destinations and events ? Enjoy special travel packages and amenities at hotels worldwide, as well as select concerts, shows, major sporting events, and more, nationwide. Introductory annual fee of $0 for the first year, then $175. Get a decision in as little as 60 seconds.
Annual Fee Signing Promo APR, fixed Intro APR Promotions $0 the first year, then $175 25,000 American Express Membership Rewards Bonus after spending $2,000 - in first 3 months. N/A Purchase: None Bal Trans: None

Chase also offers the Ink Bold, which is a business charge card.  Details are below.

Ink Bold℠ with Ultimate Rewards
	50,000 bonus points after you spend $5,000 in 3 months - that's $500 in rewards of your choice, or $625 towards airfare when you redeem online through our Ultimate Rewards booking tool No limit to the number of points you can earn - and points do not expire 5X points per dollar on the first $50,000 spent annually on eligible business purchases No foreign transaction fees and Free Employee Cards No interest or over limit fees No Annual Fee in the first year - that's a $95 savings
Annual Fee Signing Promo APR, variable* Intro APR Promotions $0 the first year, then $95 50,000 Chase Ultimate Rewards Bonus after spending $5,000 - in the first 3 months. N/A Purchase: None Bal Trans: None