charge cardsA charge card is very different than a credit card. A charge card is a card which is issued with the requirement that the user pay off the balances in full within one month. A charge card is not a line of credit, it’s just a simple way to push off paying for a purchase until the next month rolls around. Many businesses use charge cards for the sole purpose of simplifying their purchases into one monthly bill.

Charge cards also impact your FICO score in ways that a credit card does not. Whereas a credit card is an offer to use a line of credit, the charge card does not have a line of credit. Thus, there is no credit line reported to the credit bureaus by your charge card. So, on balance, a charge card will have zero impact on one of the largest and most important parts of your score: the utilization ratio. A utilization ratio is your current balance divided by your credit line.

The payment history is just the same for a charge card as it is a credit card. When you make routine payments on time and in full, that history is reported to the bureaus and will positively affect your credit score. Late payments will adversely affect your score.

The balance you have on a charge card will also be reported when the issuer reports your history each month. Keep in mind that this will not affect your utilization, although it may have an impact when your credit report is manually reviewed by mortgage lenders, insurance companies, or employers. A high balance is never good; although in such a case you can prove your ability to pay off the card with checking or savings account statements, for example.

The benefits of a credit card or charge card go beyond the credit score benefits, but if you want a card for the sole purpose of building credit, opt for a credit card over a charge card. Credit cards report utilization, a very key part of a good credit score.

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