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How Will a Charge Card Affect My Credit Score?

Nov. 5, 2010
Credit Card Basics, Credit Cards
How Will a Charge Card Affect My Credit Score?
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This article is out of date

In October 2018, American Express rebranded the Premier Rewards Gold Card from American Express as the American Express® Gold Card. This article refers to the original version of the card, which stopped accepting applications in 2017. Because of the rebranding, this article is out of date. See our details page for the American Express® Gold Card for the current offer.

If you’re weighing your options and comparing charge cards vs. credit cards, you should know that charge cards function a bit differently than standard credit cards. With charge cards, you are required to pay bill in full each month; there’s no revolving credit line. Charge cards also generally have no pre-set spending limits, so there’s no official concept of a “credit limit.” Instead, the company just decides whether to approve or deny your expenditures in real-time, based on a number of proprietary credit risk measures. So if you can’t carry a balance, and you don’t have a credit limit, what does this mean for your credit score?

According to FICO, 30% of your credit score depends on your credit utilization ratio, or the percentage of your open credit lines that are actually being used. For example, if you have a credit card with a $5,000 limit and you have a $1,000 balance, then your utilization ratio would be 20%. The lower this ratio, the better it is for your credit score, since it shows creditors that others are willing to offer you plenty of credit, and you haven’t gone crazy maxing it out.

When it comes to charge cards, though, here’s the problem: It’s not initially clear how a charge card should affect your credit score. What’s the utilization ratio on a card with no limit and no balance? Is it 0%? Is it 100%? Neither. The way charge card issuers handle it is that they report a “high limit,” which is your highest balance to date, rather than a credit limit, and they report the credit line as “open” rather than “revolving” (not to be confused with “active” vs “inactive”). When credit bureaus see open accounts with high limits instead of credit limits, they simply don’t include them in credit utilization ratios, so they have neither a negative nor positive impact on your score.

That’s not to say they don’t do anything for you. Having the credit account does help your credit score over time because it increases the average length of your credit lines, as well as your payment history — assuming you pay on time! — which combined make up 50% of your credit score. If all you care about is your credit score and you keep your balances low, you might be better off with a revolving card, but at the end of the day the most important piece of your credit score is whether you are responsible with your cards. Whether you have a credit card or a charge card is a technicality.

What charge cards are worth considering?

American Express is the only general-use card issuer that is still offering charge cards to consumers now that Diners Club no longer accepts new applicants in the U.S. The most useful is the Premier Rewards Gold Card from American Express, with much better rewards than the American Express® Green Card, and a much lower annual fee than The Platinum Card® from American Express.