Charge cards and credit cards may look the same, but they are distinctly different in one key aspect that directly affects your credit score.
- Charge cards typically don’t have a predetermined credit limit. This is because charge cards don’t let you carry a balance from one month to the next. Your entire bill must be paid in full each month. You get a lot of flexibility, but you don’t have the ability to pile on debt month after month.
- Credit cards have a specific credit limit that you cannot exceed. Credit cards, of course, allow you to carry a balance and do not need to be paid off in full each month. You can add more debt month after month, but your credit limit puts a hard cap on just how much debt you can take on.
Because charge cards don’t have a credit limit, they are not factored into your credit utilization ratio, which is a major component of your credit score.
Factors in your credit score
First, it’s important to understand what factors make up your credit score:
- 35% of your FICO credit score is your payment history. Late or missed payments have a negative affect on your score, while making payments on time each month has a positive effect on your score.
- 30% of your FICO score is the amounts you owe. This is where credit utilization comes in. Utilization is simply the percentage of your availble credit that you’re using. If you have a $1,000 credit limit and $300 in credit card debt, your utilization is 30%. It is a good idea to keep this percentage under 30%, as it shows lenders that you are responsible with your spending and paying off your debt.
- 15% is the length of your credit history. Your credit score factors in things like how long your credit accounts have been open, the age of your oldest account and the average age of all your accounts.
- 10% is the types of credit in use. Having credit cards and installment loans with a good payment history will increase your credit score.
- 10% is new credit, and how many new accounts you have by the type of account.
Charge cards and utilization ratio
Because charge cards don’t have a credit limit and aren’t factored into utilization ratio, they have a lesser effect on your credit score than credit cards do.
Even so, charge cards do involve borrowing money so they have some impact on your credit scores. The biggest factor in your scores is whether you make your payments on time, and payments on charge cards count toward that. Your charge card also contributes to your credit mix — the “types of credit” factor — and the length of your credit score.