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Credit Cards vs. Charge Cards - Which Way Should You Turn to Build Out a Credit Score?

by Laura Ginn Writer

Many people use the terms "credit card" and "charge card" interchangeably. In truth, though, these are two different payment systems with different features. Before you apply for one of these products, it's important to understand that each of these payment systems can affect your credit score in different ways.

What is a charge card and how is it different from a credit card?

A charge card is a spending card that needs to be paid off in full when the bill arrives at the end of each month. Charge cards don't come with set spending limits. The card-issuing company dynamically sets your spending threshold based on your financial position, spending history, payment history, credit score and other factors.

Since charge cards are designed to be paid off in full each month, they don't come with minimum payment levels or interest rates. If you spend on a charge card and are then unable to pay off what you've spent, you need to pay stiff penalties. If you still can't pay your balance off after you get hit with penalties, you risk having the card revoked. Credit cards have none of these features.

Credit cards are spending cards that are designed specifically to allow people to use their credit in any way they wish. As long as you make your minimum payment each month (it's usually 1% of what you owe) and agree to let the credit card company write up ever-increasing levels of interest to your account, it's easy to carry an unpaid balance from one month to the next. Credit cards give you the freedom to determine when to accept risk and when not to. With charge cards, you aren't allowed risk, at all.

Sometimes, card companies try issuing hybrid card products - charge cards that do allow users to carry a balance forward. This isn't an automatic right with these cards, though. You are only allowed to carry a balance forward on large transactions after you seek special permission.

What kind of providers issue charge cards?

The first charge card was created by Diners Club in the 50s. American Express came shortly after and established the modern charge card/credit card format. Today, every major card company has a charge card product. Many banks issue them. The most popular and well-established charge cards come from American Express; their Platinum Rewards Gold card and Platinum card are standards in the charge card industry.

How do charge cards affect your credit score?

The rating algorithms that credit rating agencies use give much weighting to credit card usage patterns. The algorithm looks at your credit limit, how much of it you spend and how often you miss payments. Between 20% and 30% of your final score depends on your how you use your credit cards.

Charge card usage patterns can't be plugged into credit card algorithms. Since they don't come with spending limits, they don't lend themselves to credit utilization ratio calculations. Even when you spend thousands of pounds with your charge card, the credit rating agency can have trouble finding out how much of your spending limit you're using. In the past, credit agencies looked at the maximum balance that you ever carried on your charge card and used that figure as an informal idea of your credit limit. Now, they simply set charge card credit utilization numbers aside when they calculate the credit score of a person with such a card. They look at his payment pattern, isntead.

While credit reporting agencies may not know what your exact spending limit is, they do know that charge cards come with high spending limits. If you continue to hold on to your charge card, they know it means that you pay your entire balance off each month. This makes you look creditworthy.

While you certainly can build your credit score with a charge card, these cards don't give credit reporting agencies all the information they need. Owning a credit card in addition to a charge card can help the credit reporting agencies build out your credit report better.

Laura Ginn understands that charge cards are a great way of rebuilding a damaged credit rating as the balance must be paid off in full every month. To learn more about charge cards visit http://www.uswitch.com/credit-cards/charge-cards/ and see if they could be of benefit to you.


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About Laura Ginn Freshman   Writer

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Joined APSense since, April 25th, 2013, From Lincolnshire, United Kingdom.

Created on Dec 31st 1969 18:00. Viewed 0 times.

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