3 Reasons Charge Cards Are Better Than Credit Cards

With most credit cards, you're free to carry a balance from month to month. It's usually not the best idea, as credit cards have high interest rates. But you have the option if you want.

Charge cards work differently. These are a type of credit card that are designed to be paid in full every month. While they aren't too common, some of the most popular cards on the market are charge cards. Just like other credit cards, charge cards can offer lots of perks, including rewards and purchase protections.

I consider charge cards an even better option than credit cards. Here's why.

1. They keep you out of debt

Credit card debt is a serious financial issue that affects millions of Americans. The average amount of credit card debt is $6,380, according to the credit bureau TransUnion. With average rates topping 20%, many consumers are paying well over $1,000 in interest every year.

The best way to use a credit card is to pay it off every month. If you do this, you can take advantage of all the benefits without the costly interest charges.

Since charge cards require that you pay in full, they essentially force you into good payment habits. There's no temptation to spend more than you can afford and pay it back later, like there is with credit cards, because you don't have that option.

If you're in credit card debt, consider getting a card with a 0% intro APR on balance transfers. You'll be able to transfer over your debt and pay it down interest free. It can help you get out of debt faster while avoiding interest charges. Click here to learn more and see our list of the best balance transfer cards.

2. They have flexible spending limits

When you're approved for a credit card, the bank sets a credit limit based on your credit history and income. If you're approved for a $3,000 limit, that's the most you can spend with your card. The only way to spend more is to get a credit limit increase, which the bank may or may not be willing to approve.

But most charge cards have no pre-set spending limits. This doesn't mean you can spend as much as you want. It just means the bank doesn't set a fixed credit limit on your card. It will adjust how much you can spend based on your financial activity.

You're not flying completely blind here. Banks typically offer a tool in your online account that you can use to check your spending power. You enter the amount you want to spend, and you'll receive confirmation if it will be approved.

3. They don't affect your credit utilization

Credit utilization is one of the main factors that determines your credit score -- it's worth 30% of your FICO® Score. Banks report your card balances and credit limits every month. That information is used to check how much of your credit you're using. For example, if you have $7,000 in balances and $10,000 in credit limits, your credit utilization is 70%.

Charging too much on your credit cards is bad for your credit score, because it looks risky to lenders. A popular rule of thumb is to keep your credit utilization below 30%. If you have a $10,000 credit limit, you'd want to keep your balance below $3,000 at all times.

Because charge cards don't have a credit limit, using them has no impact on your credit utilization. It's one less factor you need to worry about regarding your credit score.

If you've just noticed that the credit card you want is actually a charge card, don't let that deter you. This type of card can work out just as well or better for your finances. And when you use regular credit cards, it doesn't hurt to use them like charge cards. Paying in full is a smart financial habit, whether your card requires it or not.

If you're ready to see some of the best credit and charge cards, check out our list of the best card options here.