How Will a Charge Card Affect My Credit Score?

by on November 5, 2010

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
American Express Premier Rewards Gold Credit Card
Apply Now

on American Express's
secure website

  • Get 25,000 Membership Rewards® points after you spend $2,000 on purchases on your new Card in your first 3 months of Card Membership.
  • Earn Fast: 3X points for flights booked with airlines, 2X points at US gas stations and US supermarkets, 1X points on other purchases. Terms and limitations apply.
  • You can transfer points to over 20 frequent traveler programs or use points for gift cards at popular stores.
  • Use your Card for retail, dining, travel or groceries, then go online and use points towards your eligible charges.
  • As an added bonus, you can get 15,000 points after you spend $30,000 in purchases on the Card in one year.
  • $0 introductory annual fee for the first year, then $175.
  • Terms and Restrictions Apply.
  • Has annual fee
  • Needs excellent credit
Annual Fee Signup Bonus APR , Fixed APR Promotions
Introductory annual fee of $0 for the first year, then $175 Get 25,000 Membership Rewards® points after you spend $2,000 on purchases on your new Card in your first 3 months of Card Membership. N/A N/A [You must pay your balance in full each month]

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

Ink Bold® Business Card
Chase Ink Bold with Ultimate Rewards Credit Card
Apply Now

on Chase's
secure website

  • Earn 50,000 bonus points after you spend $5,000 in the first 3 months from account opening. That's $625 toward travel when you redeem through Chase Ultimate Rewards.
  • No interest charges because you pay your balance in full each month.
  • Earn 5X points per $1 on the first $50,000 spent annually at office supply stores, and on cellular phone, landline, internet, and cable TV services.
  • No foreign transaction fees.
  • Direct access to a live service advisor anytime.
  • 1:1 point transfer to leading frequent travel programs with no transfer fees.
  • $0 Intro Annual Fee for the first year, then $95.
  • No foreign transaction fee
  • Has annual fee
Annual Fee Signup Bonus APR , Variable* APR Promotions
$0 Intro Annual Fee for the first year, then $95 Earn 50,000 bonus points after you spend $5,000 in the first 3 months from account opening. N/A Purchase: None
Transfer: None

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  • Thederekdispose-temp1

    Thia is no longer true. Fico themselves say charge cards have not been used at all in the debt utilization ratio for ober 10 years. The only thing that counts is account age and payment history Rumorville. Nothing more. Waste of an article.

    • Tim

      Haha, thanks for the comment but that’s exactly what we said above.

      So if we are in agreement, then perhaps it wasn’t a complete waste :-)

  • Bill

    According to Equifax, the outstanding amount on an Amex card IS used when totaling all open balances against the total credit line (AMEX=0). I spoke to them this past April and my credit report adds the Amex balance at the end of the report section to the other credit card balances and then calculates the total credit utilization.
    It would be nice if the 3 credit reporting agencies would issue a definitive statement on how the balances of Amex accounts affects one’s credit score.

  • Bill

    One more fact: Each time I pay the full monthly balance on my Amex account, my FICO score goes up. Using the card during the billing cycle causes my score to go down. This is a single variable account, I do not use my other 3 credit cards at all. There are NO other debts in my accounts. No mortgages, car payments, NOTHING.

  • Key

    I hear that variety in the types of credit you borrow also factors into your FICO score by 10%. Does the charge card count as a different type of credit than the revolving credit cards so it boosts this 10% of your FICO?