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Is a Charge Card Bad for Your Credit Score?

Rohini Mohan Feb 18, 2019
Even though a lot of us mistakenly believe charge cards to be the same as credit cards, the two are actually very different from each other. A charge card has an inbuilt debt prevention system, which makes it a great tool for keeping credit scores up.

Did You Know?

In 1959, the first embossed plastic charge card was issued by American Express.
Only those with an excellent credit score are considered as worthy applicants for charge cards. Now that should come as good news for those who are worried about whether a charge card would harm their credit score or not. The charge cards market is dominated by American Express and Diners Club International.

Charge Card vs. Credit Card

There are some basic differences between credit and charge cards, and some obvious advantages that charge cards enjoy over credit cards.
Firstly, unlike a credit card, a charge card does not allow minimum payments, and does not have a revolving credit line. Instead, it requires that the payment be made in full and on a monthly basis. Failure to make the payment when it is due leads to imposition of late fees.
Secondly, since a charge card does not have an interest rate, it does not accrue interest.
Thirdly, there is no present limit on spending, and thus, charge cards do not impose any purchasing limit on the cardholder. That being said, the issuer can still deny further purchases after taking into consideration the cardholder's spending history, credit record, financial resources, and ability to pay off balances.
The reward points available on charge cards are a lot more superior than those usually offered by credit cards. For instance, reward points can be availed for travel insurance and benefits, warranty protection, tradable points, etc.

How a Charge Card Affects Credit

Credit bureaus take several factors into consideration while calculating the credit score of an individual, and the same prudence is applied while dealing with charge card owners.
In case of charge cards, the card issuers report a 'high limit', which is the cardholder's highest balance yet or to-date. The credit line of a charge cardholder is reported as 'open' instead of 'revolving'.
Since a charge card does not have any credit limit, the card won't figure into the cardholder's credit utilization rate. Also, credit bureaus do not include open accounts while calculating the ratio of debt to credit availability. So, debts on the charge card will not impact the credit utilization rate of the cardholder.
However, debts on a charge card will affect the credit score in indirect ways, because, like normal balances on credit cards, charge card balances are added to the total debt owed by the cardholder in all his/her accounts.
Secondly, since the payment history from a charge card is also included in the FICO credit score, all late payments and imposition of late fees negatively impact the credit score of the cardholder. For instance, the credit score will not be so good if the credit report shows a history of late payments and collection accounts (debts).
On the other hand, making payments on time and in full is good for the credit score of the individual. The credit bureau will also make a note of the amount of debt owed and the inquiries made on the cardholder's account. The bureau will also take into account the amount of credit available, and the pending payments to be made.
Therefore, to sum it up, charge cards are meant to help keep debt away, and keep a check on expenditure and purchases. With making monthly payments being the only option, the scope of forgetting to pay bills does not arise. On the flip side, not paying bills on time or stacking debt, will affect the credit score, much like how credit cards do.