credit cards

Are charge cards bad for credit scores?

Leslie McFaddenq_v2.gifDear Credit Card Adviser,
I have been searching the Internet for a while to find this answer, but have yet to arrive at a conclusion. Hopefully you can help! I have several credit cards, all of which I pay off in full every month. I use my American Express more than any other because of points I accrue; however, a friend of mine had said that since it is a charge card it negatively affects my credit score. I understand there are a lot of factors that go into calculating my score, but is using a charge card bad?
-- Josh

a_v2.gifDear Josh,
Using a charge card responsibly will not harm your credit score.

Let me define charge cards for the benefit of anyone who confuses them with regular credit cards. A charge card is a type of credit card that users must pay in full when they receive a monthly statement. The whole amount is due, so there is no minimum payment or interest rate. Credit cardholders have the option to carry a balance and pay finance charges for the privilege. Both types of cards can appear on credit reports.

American Express charge cards have what's called "no preset spending limits." Purchases are approved based on spending and payment history, credit record and personal resources, according to the company. The cap fluctuates with the cardholder's means and borrowing behavior.

Because American Express doesn't have a set limit to report to the credit bureaus, it instead reports a "high credit," or the customer's highest monthly balance to date. The reporting of a high credit in absence of a limit doesn't impact the FICO credit score, according to Barry Paperno, consumer operations manager for the Minneapolis-based credit score developer, as long the account type is listed as "open" on the consumer's credit report. The "open" account type has nothing to do with whether the card remains active or canceled.

A major component of the FICO score is a person's utilization, or debt-to-credit limit ratio. This ratio only measures debt levels on revolving accounts, such as credit cards. Paperno says that current FICO scoring models exclude charge cards or other accounts listed as open from the utilization, even though previous versions did include them.

This may or may not be welcome news. "If your balances are low on those (charge) cards, you'd probably do better with your score if it was reported as revolving, but it's not a revolving product," says Paperno.

You said you use your charge card more than your credit cards. No matter how high the balance is, it won't hurt your score as long as the bill is paid in full each month and on time. As with credit cards, paying short or late will lower your score.

To ask a question of the Credit Card Adviser, go to the "Ask the Experts" page, and select "Credit cards" as the topic. Read more columns by the Credit Card Adviser.

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