Working to increase your credit score is a worthwhile endeavor-- it makes it easier and cheaper to borrow money, helps you achieve low insurance rates, and can even impact your ability to rent an apartment or get a job. In this article, we'll look at whether American Express helps build your credit score any more than other credit card issuers.
American Express is unique in that it is the only major issuer that still offers financial products that are similar to charge cards. Charge cards aren't identical to credit cards and, therefore, can impact your credit scores in a different way.
Let's dive in and take a look at what you need to know about building your credit score using American Express charges or credit cards.
American Express is a credit card company that issues both traditional credit cards as well as charge cards to consumers. If you are considering applying for an Amex card, it's worth understanding that these two financial products are not identical.
Traditional charge cards have no preset spending limit and require that you pay off the balance in full every month. This is opposed to traditional credit cards, which have a credit limit and allow you to carry a balance from month to month at the cost of being charged interest.
American Express is the only major card issuer that still offers charge cards to consumers.
That being said, the concept has evolved over time in order to allow some customers to "Pay Over Time" for eligible purchases.
Some of the charge cards offered by Amex include:
There are also a few retailers that offer charge cards, most of which are chain gasoline companies. With these cards, you can only make purchases within the brand. Though they are similar to charge cards in some ways, many will allow consumers to carry a balance on the card. There are also some charge card options for small businesses, including the Capital One Spark Cash Plus.
You can build credit using both credit cards and charge cards. However, their different structures mean they don't impact your credit in the same way.
A credit card issuer, including American Express, will check your credit when you apply for either a charge card or a credit card. They won't just do a soft pull of your credit-- they will run a hard inquiry.
Unlike soft inquiries, hard inquiries will be viewable by those who pull your credit report for up to two years. Though this can have a slight negative impact on your credit score, the effect is usually minor and diminishes over time.
One major factor that impacts your credit score is your credit utilization ratio. This is a metric that compares how much available credit you have to how much credit you are using at a given time.
When you use a credit card, your credit utilization rate will be determined by comparing the statement balance of your account at the time of reporting to your preset credit limit. The lower your credit utilization rate is, the better, as it shows lenders and creditors that you are a responsible borrower.
Since charge cards don't have a credit limit in the same way credit cards do, it makes it very difficult to determine a credit utilization ratio. The two major credit scoring models, VantageScore and FICO, don't incorporate charge card accounts when they are calculating your credit utilization. Some older scoring models, however, will still account for charge cards when running this calculation.
You can work to build a strong credit profile by making on-time payments for both credit cards and charge cards.
With credit cards, you only have to make the minimum monthly payment in order to have your payments reflected positively on your credit report. Of course, if you only pay the minimum monthly payment, you will incur interest charges unless you are still in the promotional introductory period for a 0% APR card.
With traditional charge cards, however, you are required to pay the balance in full every month. That being said, some Amex charge cards will allow you to pay overtime for eligible products, making them more like a hybrid between a charge card and a credit card.
If you fail to make a payment by more than 30 days, it will show up as a late payment mark on your credit report. This can remain on your credit file for seven years. Payment history is a significant part of your credit score, which is why it is important to make payments on time every month.
American Express issues plenty of traditional credit card options, but they are unique in being the only major issuer that still offers charge cards to consumers.
These cards also tend to come with a bunch of perks, potentially including things like:
If you're considering one of the American Express financial tools that have features similar to charge cards, it's worth understanding how they can impact your credit.
Oftentimes, you'll hear the words "credit card" and "charge card" used interchangeably. The truth is, though, there are some distinct differences between the two that are worth understanding.
When you're making a purchase, charge cards and credit cards work exactly the same way. Merchants won't need a special card reader to process your payment when you use a charge card, nor will you struggle to use your charge card online.
There are two significant differences between charge cards and credit cards that are important to understand:
If you don't pay off the full balance of your charge card every month, it can have a number of potential consequences, including:
Charge cards will usually have a substantial annual fee. The reason for this is that the issuer doesn't make any money off the interest because cardholders are expected to pay the balance in full each month.
There are a number of different factors that charge cards can impact that influence your credit scores.
However, they won't be factored into your credit utilization rate by FICO or VantageScore because they don't have a preset spending limit.
What this means is that charge cards do not have as significant an impact on your credit score as credit cards do.
This can be either a good thing or a bad thing, depending on what your needs are. Spending a big chunk of money using a charge card won't likely have as much of a negative impact on your credit scores as if you spent the same money on a credit card. On the other hand, you won't benefit from spending little on a charge card because it's not factored into your credit utilization.
Charge cards will usually have a lesser impact on your credit score than credit cards. This is because your credit utilization ratio is a major factor that influences your credit score. Without a preset spending limit, charge cards don't count toward this metric.
You can use both credit cards and charge cards to build credit. If you maintain low balances, though, a credit card will have a greater positive impact on your credit score than a charge card.
That being said, your payment history is the most important factor when it comes to your credit scores. Just because charge cards have a lesser effect than credit cards, it doesn't mean they have no effect at all. Making charge card payments on time will help your credit score, just like it will positively impact your score to make credit card payments on time.
Both credit cards and charge cards can help you increase your credit score if you use them responsibly. American Express is one of the major card issuers in the U.S., and using one of their cards can certainly help you build credit if you make payments on time and maintain a low balance.
That being said, you shouldn't expect to build credit with an American Express credit card any faster than with a card from another issuer. Credit cards, in general, are a very useful tool for building credit.
The reason that credit cards can help you build credit is that they will typically report the activity on your account to the three major credit bureaus.
These national credit bureaus-- Equifax, Experian, and TransUnion-- use the information that credit card companies report to create your credit reports. Your credit reports are the resources that are used to calculate your credit scores.
Opening a credit card or becoming an authorized user are both ways you can start building credit with a credit card. If you have a thin credit profile and don't have the option to become an authorized user, there are a few options to help you start building credit with a card:
How you use your credit card will be an essential factor in how it impacts your credit. The most important things when it comes to responsible credit card usage are:
Your payment history is the most important factor when it comes to calculating your credit scores. Every month, you will want to make sure you make at least your minimum payment on time.
If you don't pay your credit card bill on time, you will most likely be charged a late fee. If your card has a promotional interest rate or an introductory rate, you'll probably lose this privilege when you miss a payment date. If you miss the payment by 30 days or more, you'll start racking up negative marks on your credit profile that damage your credit scores.
It can be hard to remember to pay credit card bills on time, and even one slip-up can be costly for your credit and for your wallet. For this reason, the best thing to do is to set up autopay on your account so that the minimum monthly payment is at least always covered. Of course, you'll need to make sure there are sufficient funds in your linked account to ensure the payment goes through.
Though making the minimum monthly payment is essential, it's ultimately best to pay as much of your balance as you can every month. Otherwise, interest charges will start stacking up, and you'll struggle to keep your utilization rate low.
As mentioned earlier, your credit utilization is the balance on your credit card relative to the credit limit on the card. This is another significant factor used to calculate your credit scores.
When it comes to your credit utilization ratio, experts suggest you keep it under 30%. However, lower is always better when it comes to credit utilization. For the best possible credit scores, try to keep it under 10%.
You want to keep your credit utilization ratio as low as possible for the sake of your credit score. Maintaining a low balance is how you can achieve this. Of course, how low you need to keep your balance has to do with what your credit limit is. Using $500 of credit for a card with a $ 1,000 credit limit is a very different story than using the same amount of credit on a card with a $10,000 credit limit, for example.
If you want to keep your reported balance low for your credit score, you'll want to make your credit card payments before your statement period ends. Usually, it's advised that you pay the balance 21 to 25 days before the due date on the account.
American Express credit cards and charge cards can both help you build credit if you use them responsibly. However, charge cards tend to have a lesser impact on your credit scores because the major credit scoring models don't incorporate charge cards into your credit utilization ratio. This can be either a good or bad thing depending on how you plan to use your charge card.
If you are interested in building credit, the bottom line is that responsible credit usage is more important than which particular credit card issuer you receive a card from. An American Express credit card will be just as useful as another credit card with identical terms, assuming you make your payments on time and keep your balance low.
Understanding the world of credit can feel pretty overwhelming at first, but increasing your financial literacy is a task that is well worth the effort. By learning how you can build credit and increase your score, you can open up new and beneficial financial opportunities for yourself down the road.
Are you searching for more resources to help you as you work to increase your credit? Make sure you check out our Credit Building Tips blog.