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Charge cards can help you build credit, but they differ from traditional credit cards — here's how

Charge cards are a specific type of credit card that works a bit differently. Here's exactly what a charge card is and how it affects your credit score.

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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.

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.

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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 from credit cards: 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 that doesn't mean you can spend whatever amount you want.

For instance, American Express 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.
American Express

In other words, you don't receive a maximum spending limit when you're approved for the card. Rather, the charge card issuer adjusts your credit limit from month to month based on your behavior and history as a cardholder — and it's constantly in flux.

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.

What are charge cards used for?

Charge cards can be used for both everyday spending and making big-ticket purchases, such as electronics, appliances and jewelry. Depending on your creditworthiness, spending patterns, payment history and financial resources, this might mean a spending limit that's double or triple that of a traditional credit card.

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 the 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 card, there's a tool available online or via the Amex app that allows you to check your purchasing power.

What is an example of a charge card?

Several popular American Express cards like The Platinum Card® from American Express and American Express® Gold Card used to be considered charge cards because they didn't offer preset spending limits and needed to be paid off in full each billing period. However, this is technically no longer the case.

Although these cards still benefit from not having preset limits, both Amex personal and business cards now provide a Pay Over Time feature, which allows you to buy now and pay later on eligible purchases of $100 or more (but you will incur interest). However, you do have the option to unenroll from Amex's Pay Over Time feature. Additionally, consumer cards added the Pay It® and Plan It® features, which also provide more flexibility on when cardholders can pay their bills. Terms apply.

Most charge cards on the market now are geared toward businesses, such as The Plum Card® from American Express and the Brex Business Card.

Don't miss: Amex expands Pay Over Time auto-enrollment to business Green, Gold and Platinum cards

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: the 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 by 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.

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Information about the Plum Card® from American Express has been collected independently by Select and has not been reviewed or provided by the issuer of the card prior to publication.

The Brex Mastercard® Corporate Credit Card is issued by Emigrant Bank, Member FDIC. Terms and conditions apply. See the Brex Platform Agreement for details.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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