The terms credit card and charge card are often used interchangeably, but did you know they are actually two different things? Both cards affect your credit, but in different ways. Here is some more information on credit cards versus charge cards to help you decide which is better for you to use.
Credit Cards
Credit cards have credit limits determined in advance. You must make a payment every month, but you can choose to make the minimum payment instead of the full balance. There is interest charged on any balance that carries forward each month.
Charge Cards
Charge cards do not have a pre-defined charge limit. However, that does not mean that you can charge any amount that you wish; the company will decide in real time whether or not to accept your charges based on different risk measures (such as your current balance and past history). The balance on a charge card is due monthly and must be paid in full to avoid hefty penalties.
Credit Cards versus Charge Cards
Credit bureaus use several factors to determine your credit score. Two of the major factors are payment history and credit usage. For both credit cards and charge cards, the balance and your payment record is reported to credit bureaus. They both therefore help build credit history when you make payments on-time. Since credit cards also include information on your balance compared to your credit limits, it provides valuable credit usage data. Keeping balances low can help improve your score as it demonstrates that you are not heavily relying on your credit cards. Credit cards can therefore be more beneficial towards your credit scores. This additional reporting factor and benefit to your score is the difference that you should keep in mind when comparing credit cards versus charge cards.