Ah, the world of credit scores! It's a fascinating, sometimes confusing, but undeniably crucial aspect of our financial lives. And when it comes to credit, American Express (Amex) holds a unique position. If you're wondering how having an Amex card might affect your credit score, you're in the right place! Let's embark on a detailed journey to understand this relationship, step by step.
Step 1: Let's Get Started – What's Your Credit Score All About? ️♀️
Before we dive into the specifics of American Express, let's ensure we're on the same page about credit scores in general. Do you know what factors contribute to your credit score? It's like a financial report card, summarizing your creditworthiness to lenders. The higher your score, the more financially reliable you appear, potentially leading to better loan terms, lower interest rates, and easier approvals for various financial products.
There are two primary credit scoring models used in the U.S.: FICO Score and VantageScore. While their exact calculations differ slightly, they generally consider similar factors. Let's look at the key components that make up your credit score, as these are precisely what Amex (and any other credit issuer) influences:
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How Does American Express Affect My Credit Score Payment History (35-40%):
This is by far the most important factor. It reflects whether you pay your bills on time. Late payments, defaults, and collection accounts can severely damage your score.
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Amounts Owed / Credit Utilization (30%):
This refers to the amount of credit you're using compared to your total available credit. A high utilization ratio (e.g., using $900 of a $1,000 limit) can negatively impact your score. Keeping it low, ideally under 30%, is generally recommended.
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Length of Credit History (15%):
The longer your credit accounts have been open and in good standing, the better. It shows a track record of responsible credit management.
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Credit Mix (10%):
Having a healthy mix of different types of credit (e.g., credit cards, installment loans like mortgages or car loans) can be beneficial, as it demonstrates your ability to manage various forms of debt.
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New Credit (10%):
Opening multiple new credit accounts in a short period can be seen as risky and may temporarily lower your score. Each new application typically results in a "hard inquiry" on your credit report.
Step 2: Applying for an American Express Card – The Initial Impact
So, you're eyeing an American Express card – perhaps a travel rewards card, a cash back option, or one of their prestigious charge cards. The very act of applying for a new credit product from Amex will have an immediate, albeit usually temporary, impact on your credit score.
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Hard Inquiry:
When you submit an application for an Amex credit card or charge card, American Express will perform a hard inquiry (also known as a "hard pull" or "hard credit check") on your credit report. This allows them to assess your creditworthiness. A hard inquiry will appear on your credit report and can cause a small, temporary dip in your credit score, typically a few points. It usually stays on your report for up to two years, but its impact on your score diminishes after about 12 months.
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New Account Opened:
If your application is approved, a new account will be added to your credit report. This new account can slightly decrease the average age of your overall credit accounts, which might have a minor, temporary negative effect on your "Length of Credit History" factor. However, this is usually outweighed by the long-term benefits of a new, well-managed account.
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Credit Limit Increase (for Credit Cards):
For American Express credit cards (which have a defined credit limit), being approved means your total available credit will increase. This can be beneficial for your credit utilization ratio (Amounts Owed), as it immediately lowers the percentage of your credit that you're using, assuming your spending habits remain consistent.
Example: If you have one card with a $5,000 limit and use $1,000 (20% utilization), and you open a new Amex credit card with a $5,000 limit, your total available credit jumps to $10,000. If you continue to use $1,000 across all cards, your utilization drops to 10% – a positive move for your score!
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Charge Cards and Utilization:
American Express is unique in offering both traditional credit cards and charge cards. Unlike credit cards, Amex charge cards generally do not have a pre-set spending limit and typically require you to pay the balance in full each month. Because they don't have a specific credit limit, Amex charge cards do not directly affect your credit utilization ratio. However, they still contribute to your payment history and the overall length and mix of your credit.
Step 3: Managing Your American Express Account – The Ongoing Impact
Once you have an American Express card in hand, how you manage it will determine its long-term effect on your credit score. This is where you have the most control!
QuickTip: Revisit this post tomorrow — it’ll feel new.
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Payment History: The Golden Rule
This cannot be stressed enough: Always pay your American Express bill on time. American Express reports your payment activity to all three major credit bureaus (Experian, Equifax, and TransUnion). Every on-time payment builds positive payment history, which is the single most impactful factor (35-40% of your score). Conversely, a single late payment (usually 30 days or more past due) can significantly damage your credit score and remain on your report for up to seven years. Setting up autopay or reminders is a wise strategy.
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Credit Utilization (for Credit Cards): Keeping Balances Low
If you have an Amex credit card, strive to keep your balances low relative to your credit limit. As mentioned, a high credit utilization ratio indicates a higher risk to lenders. Even if you pay off your balance in full each month, the balance reported to the credit bureaus might be the one from your statement closing date. Consider making multiple payments throughout the month or paying off a significant portion before your statement closes to ensure a lower reported balance.
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Length of Credit History: Patience is a Virtue ⏳
The longer you keep your Amex account open and in good standing, the more positively it impacts your "Length of Credit History." Over time, this account will contribute to a higher average age of your credit accounts, which is favorable for your score. Think twice before closing old, paid-off accounts, especially if they are your oldest lines of credit.
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Credit Mix: A Diverse Portfolio
If your American Express card adds a new type of credit to your profile (e.g., your first credit card, or your first charge card if you previously only had installment loans), it can positively impact your "Credit Mix." Lenders like to see that you can responsibly manage different forms of credit.
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New Credit: Avoid a Spree
While applying for one Amex card has a minimal impact, applying for multiple new credit accounts from various lenders in a short period can signal financial distress to credit bureaus. This "credit seeking" behavior can lead to a more significant, negative hit to your score. Be strategic and apply for new credit only when necessary.
Step 4: Closing an American Express Account – The Potential Repercussions
While it might seem counterintuitive, closing an American Express account (or any credit account) can sometimes negatively affect your credit score.
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Reduced Available Credit:
For credit cards, closing an account reduces your total available credit. This can increase your credit utilization ratio on your remaining cards, even if your balances haven't changed. As we've learned, a higher utilization ratio can lower your score.
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Shorter Average Age of Accounts:
If the Amex card you're closing is one of your older accounts, it will eventually fall off your credit report, which could decrease the average age of your credit history. This, in turn, can negatively impact your score.
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Impact on Credit Mix:
If the closed Amex account was a unique type of credit in your profile, closing it could slightly reduce the diversity of your credit mix, though this factor generally has a less significant impact than payment history or utilization.
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Payment History Remains:
It's important to remember that the payment history associated with the closed account (both positive and negative) will remain on your credit report for up to seven to ten years, still contributing to your score during that time.
Step 5: Special Considerations for American Express Charge Cards (No Pre-Set Spending Limit)
As briefly touched upon, Amex charge cards operate differently from traditional credit cards. While they still impact your credit, the way they do so varies, especially regarding credit utilization.
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Payment History is Paramount:
With charge cards, paying your balance in full every month is typically required. Therefore, impeccable payment history is even more critical for charge cardholders, as it directly reflects your ability to manage significant spending and financial commitments. Late payments can be particularly detrimental.
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No Credit Utilization Impact (Directly):
Since charge cards don't have a pre-set credit limit, they are not factored into your credit utilization ratio in the same way as revolving credit cards. This can be an advantage if you carry high balances on other credit cards, as your Amex charge card won't negatively impact this ratio. However, the bureaus may still consider the balance you carry as "amounts owed."
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Reporting Practices:
American Express reports charge card activity to the credit bureaus as "open accounts" rather than "revolving accounts." This includes your payment history and the highest balance you've carried on the card. While the "amounts owed" factor may still consider balances, the utilization ratio specifically for revolving credit isn't impacted.
Step 6: Leveraging American Express to Build and Maintain Excellent Credit
American Express cards, when managed responsibly, can be powerful tools for building and maintaining an excellent credit score.
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Consistent On-Time Payments:
This is the number one rule. Always pay your Amex bill by the due date. Set up reminders or automatic payments.
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Keep Balances Low (for Credit Cards):
If you have an Amex credit card, aim to keep your reported balance well below your credit limit. The lower, the better, ideally under 10-20% of your limit.
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Maintain Older Accounts:
Don't be quick to close old Amex accounts, especially if they are your oldest lines of credit. Their age contributes positively to your credit history.
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Utilize Amex's Credit Monitoring Tools:
American Express often provides tools and insights into your credit score, sometimes including a FICO Score. Use these resources to monitor your progress and identify any potential issues.
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Be Mindful of New Applications:
While an Amex card can be a great addition, avoid applying for too many new credit products in a short period to prevent multiple hard inquiries from temporarily dinging your score.
By understanding how each aspect of your American Express account interacts with the different components of your credit score, you can effectively use your card to strengthen your financial standing. Remember, responsible credit behavior is a marathon, not a sprint! ♀️
QuickTip: Focus on what feels most relevant.
Frequently Asked Questions About American Express and Your Credit Score:
How to Monitor my American Express credit activity?
You can monitor your American Express credit activity through your online Amex account or their mobile app, where you can view statements, transactions, and often access your credit score and related insights.
How to Pay my American Express bill on time?
You can pay your American Express bill on time by setting up automatic payments from your bank account, scheduling manual payments through the Amex website or app, or mailing a check well in advance of the due date.
How to Keep my American Express credit card utilization low?
Tip: Slow down at important lists or bullet points.
To keep your American Express credit card utilization low, aim to spend only a small portion of your credit limit and pay off your balance in full or make multiple payments throughout the billing cycle to reduce your reported balance.
How to Understand the difference between Amex credit cards and charge cards regarding credit score?
Amex credit cards have a revolving credit limit and impact your credit utilization, while charge cards generally have no pre-set spending limit and do not directly affect your credit utilization ratio, but both impact your payment history.
How to React if my American Express application results in a hard inquiry?
Understand that a hard inquiry is a normal part of applying for new credit and typically causes only a small, temporary dip in your score; its impact lessens over time and disappears after a year.
How to Improve my credit score with responsible Amex card use?
To improve your credit score, consistently make on-time payments, keep credit card balances low, maintain your Amex account for a long period, and diversify your credit mix.
Tip: Review key points when done.
How to Deal with closing an old American Express account?
If closing an old American Express account, be aware it may temporarily affect your credit utilization and average age of accounts; consider keeping it open if it's one of your oldest lines of credit and you can manage it responsibly.
How to Check which credit bureaus American Express reports to?
American Express typically reports to all three major credit bureaus: Experian, Equifax, and TransUnion.
How to Dispute an error on my credit report related to American Express?
If you find an error, first contact American Express directly to clarify, and if needed, dispute the information with the specific credit bureau(s) reporting the inaccuracy.
How to Use American Express to build credit if I have a limited history?
If you have a limited credit history, an American Express card (especially a starter card or a secured option if available) can help by establishing a positive payment history and demonstrating responsible credit management over time.
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