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How Do Charge Cards Affect My Credit Score?

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TPG reader John emailed me to ask about credit scores:

“How do charge cards like Amex Platinum affect my debt-to-credit ratio? I know the limit doesn’t show up on my credit report, but what about the balance?”

Your debt-to-credit ratio (also known as your utilization ratio) represents the balance on your credit accounts in relation to your total credit line (for each card individually and across your portfolio). Essentially, it compares the amount of money you have borrowed to the amount you could borrow; that helps lenders decide whether you’re able to take on new debt, and is one of several factors that determine your credit score.

The utilization ratio gets twisted when it comes to charge cards like The Platinum Card and Premier Rewards Gold Card from American Express. Unlike credit cards, charge cards don’t have preset spending limits; instead, your transactions are approved on a case-by-case basis, and you have to pay the bill in full each month. The balance on a charge card is determined like normal, but since there’s no specific cap to the credit line, the utilization ratio is hard to pin down. FICO previously used the highest reported balance on a charge account as a proxy credit limit, but that’s no longer the case.

The current practice is to simply leave charge accounts out of your utilization ratio altogether. The balance might appear on your credit report, but it shouldn’t be included in the calculation. That can be helpful if you’re trying to improve your credit score, because it creates an opportunity to lower your reported balance. By concentrating spending on a charge card rather than your credit cards, you can reduce the amount that shows up on your credit report, and thereby maintain a lower utilization ratio. However, remember that you must pay those charges in full each month to avoid late fees.

Charge
Charge cards give you greater flexibility for large purchases, but remember to pay your balance in full each month.

Also, keep in mind that other aspects of your charge card are still reported as normal. That means opening a new card will add an inquiry to your credit report, and may impact the average age of your accounts. Any late payments or other negative activity will also show up, so it’s important to manage your account responsibly as you should for any credit card.

For more on charge cards and how to use then, check out these posts:

If you have any other questions, please tweet me @thepointsguy, message me on Facebook or send me an email at info@thepointsguy.com.

Premier Rewards Gold Card from American Express

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Intro APR Regular APR Annual Fee Balance Transfer Fee Credit Rating
N/A Introductory annual fee of $0 for the first year, then $195 See Terms Excellent Credit