You can make charges with any kind of credit card, but there's actually a specific type of card known as a "charge card" that has no preset maximum spending limit.
American Express is the primary issuer of charge cards, with the two most well-known being the American Express® Gold Card and The Platinum Card® from American Express. Charge cards offer premium rewards and a variety of travel and purchase protections, but they often come with an annual fee that can be a couple hundred dollars.
While charge cards are similar to regular credit cards, there are some factors that differ, such as the limits on how much you can spend and the influence on your credit score.
Below, CNBC Select reviews what a charge card is and how it affects your credit score.
What is a charge card?
A charge card is similar to a regular credit card in that it provides the ability to make purchases and pay for them later. You can also earn points and/or miles on these purchases like you would with a rewards or travel card, plus other benefits too.
However, charge cards have two big differences: 1) There's no preset spending limit; and 2) you can't carry a balance month to month.
While other credit cards assign credit limits that you can't exceed in most cases, charge cards don't. This can provide you with more buying power, since your balance is able to fluctuate every month. But doesn't mean you can spend whatever amount you want.
For instance, Amex describes its spending limit policy:
"No preset spending limit does not mean unlimited spending. Purchasing power adjusts with your use of the card, your payment history, credit record and financial resources known to us, and other factors."
In other words, you don't receive a maximum spending limit when you're approved for the card. Rather, the charge card issuer (Amex in most cases) adjusts your credit limit from month-to-month based on your behavior and history as a cardholder — and it's constantly in flux.
As a general rule, cardmembers tend to have few issues when using their charge cards for predictable, everyday spending. But to avoid your card being declined, there are ways to double check that your card will be approved for big purchases, trips or business expenses ahead of time. This will save you hassle and help you plan accordingly.
If you're unsure if a purchase will be approved on your charge card, consider calling or messaging your card issuer to inquire about the size of that expense. And if you have an Amex charge card, there's a tool available online or via the Amex app that allows you to check your purchasing power.
You also can't carry a balance with a charge card. You're typically required to pay in full every billing cycle or face penalties, such as late fees. However, both Amex personal and business charge cards provide a Pay Over Time feature, which allows you to carry a balance on eligible purchases of $100 or more (but you will incur interest).
How does a charge card affect your credit score?
Since charge cards don't have a credit limit, they don't factor into your credit utilization rate, which is the percentage of your total credit you're using. But charge cards influence the most important factor of your credit score — payment history — and three other factors: average age of accounts, number of new inquiries and credit mix.
Just like any other credit account, you should maintain on-time payments so positive information is sent to the credit bureaus and appears on your credit report.
You should also aim to keep your charge card open, since a closed account can reduce the average length of time you've had credit.
Like most credit applications, applying for a charge card will appear as a new inquiry on your credit report, which may temporarily lower your score a few points.
And since charge card accounts are considered revolving credit, closing a charge card may affect your credit mix, particularly if you don't have any other credit card accounts open. You should have a mix of revolving and installment accounts (such as personal loans, auto loans or mortgages) to show lenders you can manage different types of credit.
While your statement balance isn't factored into your credit utilization rate, you should keep it as low as possible to avoid missing a payment or incurring debt.
Bottom line
A charge card can be a good choice if you want expanded (but not unlimited) buying power and everyday rewards. Plus you'll be able to improve your credit score by using your card responsibly and paying on time every month. Since charge cards don't factor into your credit utilization rate, there's less risk of hurting your credit score, but keep in mind that they still influence four of the five main factors of your credit score.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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June 16, 2020 at 03:08AM
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Charge cards can help you build credit, but they differ from traditional credit cards—here's how - CNBC
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