Charge cards can be a great way to avoid racking up debt while still enjoying the convenience of paying with plastic. But if you're considering switching your spending from credit cards to a charge card, you should understand that the switch may have an unintended effect on your credit score.
Unlike regular credit cards, charge cards require consumers to pay off their balance in full at the end of the month. In other words, charge cards have no credit limit. So, the problem arises in how charge-card activity is reported to the credit reporting agencies and then factored into your credit score.
Since a charge card has no pre-set spending limit, the highest balance ever charged on the card is considered your "credit limit" when determining your credit utilization ratio. If the most you've ever spent is $1,000 and your credit report is pulled at a time in the month when you've already spent $750 on the card, then the result is a 75 percent utilization ratio! A regular credit card with a $10,000 credit limit would yield a utilization of only 7.5 percent —quite a big difference.
There's nothing wrong with wanting to add a charge card to your wallet, but keep in mind that you will generally end up with a limit that looks really low and a utilization ratio that's way too high. And as a result, your credit score may suffer.
