Charge card balances won't impact a FICO credit score

Question for the expert

Dear Credit Score Report,
Does an American Express card with no credit limit affect my credit utilization ratio? AmEx says no, but I want to make sure. If I have an AmEx card with no credit limit and a $3,000 balance and another card with a $3,000 limit and no balance, it would appear my utilization is at 100 percent. Am I missing something? Thanks. -- Tony M.


Answer for the expert

Hey Tony,
If that American Express charge card doesn't have a credit limit, the creator of the most widely used credit scoring model says it won't factor into your utilization ratio.

As you know, the credit utilization ratio is typically an important component of your credit score. However, charge card accounts -- which you must pay in full each month -- "are excluded when the FICO scoring model calculates credit utilization," says Craig Watts, spokesman for FICO, creator of the dominant credit score. "The model, however, does use other information reported for charge card accounts, such as the account's age and payment history, in calculating the score." So while you don't have to worry about how charge card spending will impact your credit score, you still need to make on-time payments to AmEx and exhibit other good borrowing behavior on your credit card and any other debts you may have.

Because charge cards typically don't have preset spending limits, the FICO scoring model previously considered the highest balance on those cards. "In the old days, our scoring model had an option in which, under certain circumstances, it could substitute highest balance on record for a missing limit on a charge card," Watts says. For example, if you charged $5,000 on a card one month and your balance never exceeded that amount, the model would consider $5,000 to be your credit limit. FICO says that approach hasn't been used in its general scoring models during the last 10 years, however.

For your credit card, meanwhile, FICO will calculate a utilization ratio by comparing the balance on that card with that $3,000 limit. Since a lower ratio will benefit your credit score, try and maintain low balances on that credit card. You may also be able to get the credit limit on that card increased. Some experts, however, warn that calling your bank to request a limit increase could trigger an account review that actually leaves you with less favorable card terms. Of course, by spending more with your charge card and less with your credit card, there will be less debt for the scoring model to consider.

Most importantly, remember to always make repayments on time. "Whether people have a credit card or a charge card, the most important factor in building or improving their FICO scores is using credit responsibly. That means paying their bills on time and using their credit only when needed," Watts says. "If they can do those things consistently, they should be well on their way toward maintaining a good score."

Follow these tips and you should be fine. "There are many ways to build one's FICO score over time," says Watts. "Credit cards, in general, have a strong influence on the FICO score calculation. Charge cards can be just as effective as any other credit product in helping consumers establish a credit history."

Good luck!

-- Jeremy 

See related: The components that make up a FICO credit score

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Updated: 03-26-2019