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Charge cards can affect your credit both positively and negatively. Unlike traditional credit cards, charge cards have no credit limit, and they require you to pay off the full balance each month to avoid a fee.
That means charge cards generally come with less risk of high credit utilization, which can sink your credit score—but they don't give you the option of strengthening your credit with low utilization, either. And as with any credit account, falling behind on payments will damage your credit. Here's what to know about charge cards and your credit score.
How Charge Cards Can Help Your Credit
If you choose a charge card, you're opting for less flexibility than you'd get with a traditional credit card. You'll be subject to fees, interest and potential usage limits if you don't pay off your balance in full each billing cycle. There are benefits to using a charge card, however, including the ability to build your credit in the following ways.
Payment History
The most important credit scoring factor is payment history, which accounts for 35% of your FICO® Score☉ Θ. Using a charge card regularly and paying each bill on time will help you develop positive payment history, a record of your ability to responsibly manage credit. Lenders will be more likely to approve you for credit when they see that you have paid previous accounts on time, and a charge card can help you establish that track record of creditworthiness.
Credit Mix
Credit mix is the combination of credit types that are listed in your credit report, which demonstrates to lenders that you can handle overseeing a variety of financial accounts. Charge cards can add to your credit mix if you previously only had installment credit, like auto or student loans, for example. That can positively impact your credit, since credit mix makes up 10% of your FICO® Score.
Does Not Affect Utilization
Charge cards don't come with credit limits, which makes it impossible to assign your account a credit utilization ratio—or the proportion of available credit you're currently using. That means you won't be penalized for having a credit utilization ratio above 30%, which can happen with credit cards.
Learn more: How Important Is Credit Card Utilization to Your Credit Score?
How Charge Cards Can Hurt Your Credit
It's also possible that opening and using a charge card can damage your credit, despite the fact that your credit utilization won't be affected. Here's how.
Missed Payments
If you miss a charge card payment by more than 30 days, the credit card issuer will typically report it to the credit bureaus as late, which can damage your credit score. A single missed payment can lower your credit score significantly, especially if you had a good or excellent credit score beforehand, and will stay on your credit report for seven years. The longer your payment is late, the greater the impact on your score.
Credit Age
Opening a new charge card will lower the average age of your credit accounts and add a new account to your credit report, both of which can hurt your credit. That's because length of credit history makes up 15% of your FICO® Score. Lenders prefer to see that you can manage credit over a long period, and that you limit requests for new credit. Generally, the higher the average age of your accounts and the fewer new accounts you open, the better.
Account Balances
Even though charge cards don't have an effect on credit utilization, making charges and increasing the card's balance before paying it off each month can affect your credit. If you have a balance on the card when the account is reported to the credit bureaus, the account will impact "amounts owed," the second most important credit scoring factor. The more accounts you have with balances, the more of a negative impact you may see to your credit.
How to Build Credit With a Charge Card
You can use a charge card to improve your credit scores over time. Here's how:
- Make your payments on time. Regularly paying the monthly bill by the due date is one of the best ways to use your charge card to build credit. To make sure you never miss a payment, consider setting up autopay from your checking account.
- Pay off your balance early. If you can pay off the entire balance before the end of your statement period, your card issuer might report the $0 balance to the card issuers. Having fewer accounts with balances could help your credit scores.
- Only apply for the credit you need. Once you've opened a charge card, limit the number of new applications for credit you make. Your credit will suffer if you apply for more credit and additional hard inquiries are added to your credit report. It's best to wait at least six months between credit card applications, and longer if you're hoping to improve your credit after some missteps or you're seeking a mortgage.
Managing your budget and expenses will be important for achieving all of these goals. Some charge cards have programs that let you pay off certain balances in installments, which can make it easier to fit your charge card payments into your monthly spending plan. But since that may not be available, when you get a charge card, plan to pay off the full balance every month.
Frequently Asked Questions
Do Charge Cards Build Credit?
Yes, charge cards can help you build credit as you make on-time payments each month. These payments will be added to your credit report. On the other hand, falling behind on payments will negatively affect your credit.
Do Charge Cards Affect Your Credit Utilization?
No, charge cards do not affect your credit utilization. Since they don't have a spending limit, there's no way to calculate how much of that limit you're using. But having a charge card with a balance could still affect your credit, since the number of your current accounts with balances is a factor in your credit score.
Do Charge Cards Report to Credit Bureaus?
Yes. Although charge cards aren't revolving accounts and generally won't affect utilization rates, many card issuers will still report your charge card's details to the credit bureaus—Experian, TransUnion and Equifax. They still appear in your credit report and, similar to credit cards, affect your credit scores in many other ways.
The Bottom Line
Like other credit cards, charge cards can be an essential part of your credit-building journey, as long as you commit to paying every bill on time. You can use Experian's credit card comparison platform to find a card that works well for you.
If you want to explore how to improve your credit score, track your Experian credit report and FICO® Score for free with an account from Experian. Look over which accounts are in your report, what's being reported and what's helping and hurting your credit scores so you can make a plan to improve them.