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Please Note: The utilization ratio includes the balances across all credit cards, even those you may be paying off in full at the end of the billing cycle. In short, charge cards can be a useful tool to avoid having those balances inflate your utilization ratio, particularly if you are having trouble keeping credit card balances below the recommended 30 percent of the total credit limit.
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While people sometimes use the words charge cards and credit cards together, the two are actually very different payment instruments, each come with their own unique set of advantages and disadvantages.
The main difference between credit cards and charge cards is that while credit cards allow account holders to carry accrued balances over from month to month, charge cards, for the most part have to be paid off in full at the end of the monthly billing cycle.
Furthermore, while credit cards come with a preset spending limit, charge cards do not: instead, the card issuer sets flexible spending limits, which are based on the cardholder’s previous payment history, credit rating, and estimated financial resources. These distinctions translate into significant differences when it comes to the effects the cards have on both cardholders’ finances and credit score.
Avoiding Credit Card Pitfalls
In order to avoid the pitfalls of credit cards and maximize their benefits do the following:
1. Keep track of your purchases by closely reviewing your monthly statements.
2. Have a budget and avoid overspending.
3. Make an effort to pay off credit card balances at the end of the month.
4. Make purchases with reliable companies and take extra precautions when making purchases online.
5. Report stolen cards immediately to the credit card company.
Another advantage of charge cards is that while they allow consumers to build a credit record by contributing to payment history and depth of credit, they generally won’t impact another important part of the FICO score: the utilization ratio. According to FICO’s consumer operations manager, the...
One advantage of using a charge card instead of a credit card is that it protects cardholders from accumulating credit card debt, since the balance has to be paid off in full each month. For cardholders who find that they constantly spend more on their credit cards than they intended to,...