It's the classic space versus performance tradeoff.
In MS SQL 2005, Varchar (or NVarchar for lanuagues requiring two bytes per character ie Chinese) are variable length. If you add to the row after it has been written to the hard disk it will locate the data in a non-contigious location to the original row and lead to fragmentation of your data files. This will affect performance.
So, if space is not an issue then Char are better for performance but if you want to keep the database size down then varchars are better.