American Express is a tricky bank. Their no spending limit policy on charge cards is an amazing asset for high-spenders, allowing virtually unlimited spend each month – as long as you pay it off.
But that could negatively hurt your credit score, sometimes in drastic ways. The reasoning behind this impact is a little complicated, so bear with me as I back up a little.
Credit Score Refresh
I have written about the factors of a credit score in detail, but as a reminder there are six main criteria: payment history, derogatory remarks, total accounts, credit inquiries, age of credit history and credit card utilization.
The final criterion, credit card utilization, is the important one to consider here. Utilization is the percentage of credit a person uses on a monthly basis. In very basic terms, a $10,000 credit line with $1,000 in payments (i.e. debt) means that person is utilizing 10% of available credit.
This means there are two factors impacting utilization: how high the credit line is and how much debt a person incurs. Both are equally important; both are adversely impacted with American Express charge cards.
Why American Express Hurts
OK, now for why it hurts. American Express charge cards – most popular on their bank branded cards like the Gold and Platinum products – are built without an “official” credit line. In other words, a credit agency views those cards as having $0 in available credit. Any unpaid charges left on the balance each month would thus create a negative utilization ratio.
For example, that same $1,000 in payments I outlined above would be against a $0 credit line, instead of $10,000. Consider two scenarios to further clarify the point.
Scenario 1: If a person had two credit lines at $10,000 each and a $1,000 balance, the utilization would be 5% ($1,000 divided into $20,000). I should note that 5% is considered a good, but not great rate.
Scenario 2: If one of the cards in Scenario 1 were an American Express charge card, however, the utilization would be 10% ($1,000 divided into $10,000). In a credit agencies eyes, that is remarkably worse than 5%.
The Soft Impact
The above is pure quantitative reasoning – the higher a utilization percentage, the worse a credit score. But American Express has famously succeeded via “softer” means as well – the psychological impact of not having a credit line.
It is widely known that credit cards enhance a person’s spending far more than a traditional checking account – the latter being an account that runs out. Credit cards, meanwhile, offer people the ability to pay over time, even if a person doesn’t have the funds up front. It is the same as purchasing a car or home via a loan.
Charge cards, however, go a step further. A $10,000 credit line can be maxed out, whereas a charge card is an account without a ceiling for the month long statement. Those with little or no financial aptitude may run up an untenable bill, not worrying about paying it off in the future.
The Final Word
The impact described above can have severely negative consequences to your credit score. I have seen credit scores range as much as 40 points depending on if a charge card was paid in time or not.
If you have one of these cards, or are an authorized user, check a free credit tracking service to make sure your score isn’t being artificially suppressed. By paying off the balance before a statement closes, your credit score could increase substantially – saving you thousands of dollars on a loan or keeping future card applications from being declined.