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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.
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:
- How I Charged an Entire New Car to the Amex Platinum Card
- Business Credit vs. Charge Cards — Which Is Right for You?
- Credit Card Application Restrictions for the Major Issuers
With some great bonus categories and an annual fee that’s waived for the first year, the American Express Premier Rewards Gold Card has a lot going for it. If you don’t have PRG, now’s as good a time as any to add it to your wallet, as Amex added some great new benefits several months back.
- Receive 25,000 Membership Rewards® Points after you spend $2,000 on purchases on your new Card in your first 3 months of Card Membership.
- 3X points for flights booked directly with airlines. 2X points at US restaurants, US gas stations, and US supermarkets. 1X points on other purchases. Terms and limitations apply.
- No matter where you're traveling, when you use your Premier Rewards Gold Card there are no foreign transaction fees from American Express.
- $100 Airline Fee Credit. Up to $100 a year in baggage fees and more at one airline.
- Get a $75 hotel credit on qualifying charges, plus a room upgrade upon arrival, if available with The Hotel Collection at americanexpress.com/hc. Terms apply.
- There is a $0 introductory annual fee for the first year, then $195.
- Terms and limitations apply.
- See Rates & Fees