Do charge cards build credit?
Quick insights
- A charge card is a card used to make purchases, but unlike credit cards, it typically must be paid off in full each month.
- Charge cards generally don’t affect credit utilization, but they can impact other credit-scoring factors, like credit mix, payment history and length of accounts.
- Both charge cards and credit cards can help build credit if managed responsibly, though they can affect your credit score in different ways.
Charge cards allow consumers to make purchases much like credit cards. But unlike credit cards, they need to be paid off in full each month. Typically, charge cards do not have a preset spending limit, but transactions may be approved or declined based on spending patterns and payment history.
With the differences between regular credit cards and charge cards, you might be wondering: do charge cards help build credit? In this article, we’ll dive into their impact on credit, including how they’re reported to credit bureaus and more.
Do charge cards report to credit bureaus?
Most major charge card issuers report account activity to the three main credit bureaus—Experian™, Equifax® and TransUnion®. The information that’s reported might include account status, payment history, account opening date and more.
There may be exceptions to this. For instance, charge cards issued to businesses may not be reported. You can verify with the issuer whether your payment or account activity will be reported to the credit bureaus.
Charge card vs credit card: Impact on credit score
Both charge and credit cards can help build credit if managed responsibly, but they affect your credit score in different ways. According to FICO®, here are the factors that affect your credit score and their impact:
- Payment history (35%)
- Amounts owed, also known as credit utilization (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit inquiries (10%)
Credit card activity can contribute to all of these credit scoring factors. However, because charge cards generally require you to pay off your balance in full each month, they are usually not included in credit utilization calculations.
Do charge cards impact your credit utilization ratio?
Charge cards generally don’t affect your credit utilization ratio, which is the percentage of total available credit that you’re using. However, they can still influence your credit history and credit scores in other ways, such as payment history, credit mix, age of credit accounts and new inquiries.
Traditional credit cards have a set credit limit, making utilization easy to calculate. Charge cards do not have a preset spending limit, so issuers may report the balance but not a limit. This can result in charge cards being excluded from utilization calculations. Please note that although charge cards might not have a preset spending limit, that doesn’t mean they allow for unlimited spending.
Some scoring models may treat charge card balances differently, potentially affecting the overall utilization ratio. It might be a good idea to monitor your credit reports to see how your charge card is being reported, as well as its impact on your credit utilization ratio.
Do charge cards contribute to length of credit history or mix?
Charge cards, like other credit accounts, contribute to the length of credit history. Credit history includes the types of credit accounts you have and how long you’ve had them open. Account age is considered in credit scoring models, so keeping a charge card open could help benefit your score.
Adding a charge card to your credit accounts can help diversify the types of accounts listed on your credit report, potentially contributing to a more varied credit mix. Having a variety of credit types (credit cards, charge cards, loans) may help you build credit over time. Closing a charge card may impact the average age of accounts, as well as your credit mix—so you may want to consider the effects before closing an account.
Conclusion
Charge cards can play a role in building credit, especially when used responsibly and paid off on time each month. While they differ from traditional credit cards—often requiring full payment and not impacting your credit utilization ratio—they still contribute to other major factors, such as payment history, credit mix and the length of your credit accounts.
When deciding between a charge card and a credit card, it may be helpful to consider your financial habits and goals, as each type of card offers unique benefits and considerations. Check with card issuers and regularly monitor your credit reports to understand exactly how your charge card activity is being reported.
Ultimately, incorporating a charge card into your broader credit-building strategy may be beneficial, especially if you research your options and choose the card that best fits your needs and financial situation.
