Hey there! Ever wondered how that shiny American Express card in your wallet (or the one you're eyeing!) actually plays a role in shaping your credit score? It's a fantastic question, and one that many people ponder. Building and maintaining a healthy credit score is crucial for so many financial goals, from buying a home to getting favorable loan rates. So, let's dive deep into the world of American Express and its impact on your creditworthiness, step by step!
Step 1: Understanding the Foundation of Your Credit Score
Before we specifically talk about American Express, it's essential to grasp what makes up your credit score. Imagine your credit score as a financial report card. Lenders use it to assess how risky you are as a borrower. The higher the score, the more trustworthy you appear, and the better terms you're likely to get.
Here's a quick breakdown of the key factors that credit scoring models (like FICO and VantageScore) consider, and how American Express factors into each:
Payment History (35% of FICO Score): This is the most crucial factor. It tracks whether you pay your bills on time. Late payments can severely damage your score.
Amounts Owed / Credit Utilization (30% of FICO Score): This looks at how much credit you're using compared to your available credit limits. A high utilization ratio (using a large percentage of your available credit) can hurt your score.
Length of Credit History (15% of FICO Score): The longer your accounts have been open and in good standing, the better. It shows a proven track record.
Credit Mix (10% of FICO Score): Having a variety of credit accounts (e.g., credit cards, installment loans like mortgages or car loans) can be a positive.
New Credit (10% of FICO Score): Applying for new credit results in a "hard inquiry" on your credit report, which can temporarily ding your score. Opening too many new accounts in a short period can be seen as risky.
Step 2: The Initial American Express Application and Its Immediate Impact
So, you've decided to apply for an American Express card. What happens to your credit score right away?
2.1 The "Hard Inquiry" Effect
When you submit a formal application for an American Express credit card (or most credit products, for that matter), Amex will perform a hard inquiry on your credit report. This is a thorough check of your credit history.
What it means for your score: A hard inquiry typically causes a small, temporary dip in your credit score, usually by a few points. This is normal and usually recovers within a few months, assuming no other negative factors.
Why it happens: Lenders see multiple recent hard inquiries as a potential sign of financial distress or an attempt to take on too much debt too quickly.
Amex Prequalification: American Express often offers a prequalification process, which involves a soft inquiry. A soft inquiry does not impact your credit score and allows you to see your potential approval odds. This is a smart first step!
2.2 Approval and Opening a New Account
If your application is approved, a new account will be opened on your credit report.
Impact on Length of Credit History: This new account will initially lower the average age of your credit accounts, which can have a slight, temporary negative effect on your score. However, as the account ages and you manage it responsibly, this factor will improve.
Impact on Credit Mix: If this is your first credit card or a new type of credit for you, it can positively contribute to your credit mix over time.
Step 3: American Express and Ongoing Credit Score Management
Once you have your American Express card, your ongoing usage and payment habits become the primary drivers of its impact on your credit score.
3.1 Payment History: The Gold Standard
This cannot be stressed enough: Paying your American Express bill on time, every time, is the single most important way to positively impact your credit score.
How Amex Reports: American Express reports your payment activity to the three major credit bureaus: Equifax, Experian, and TransUnion. This means every on-time payment you make helps build a positive payment history, which makes up a significant portion of your credit score.
Late Payments: Conversely, even a single late payment (typically 30 days or more past the due date) can significantly harm your credit score and remain on your report for up to seven years. Avoid this at all costs!
3.2 Credit Utilization: A Key Differentiator for Amex Charge Cards
This is where American Express often stands out, especially with its charge cards.
Traditional Credit Cards: For American Express credit cards (which have a defined credit limit), keeping your credit utilization low is crucial. Experts generally recommend keeping it below 30% of your available credit. For example, if you have a $10,000 credit limit, try to keep your balance below $3,000.
American Express Charge Cards: Many iconic American Express products, like The Platinum Card® and American Express® Gold Card, are charge cards. These cards typically have no preset spending limit. This means they do not impact your credit utilization ratio because there's no "limit" to utilize. This can be a huge advantage, especially for those who make large purchases, as it prevents those purchases from negatively affecting their utilization. However, you are still expected to pay your balance in full each month.
Responsible Use on Charge Cards: While there's no preset limit, American Express still monitors your spending and expects you to pay in full. Going significantly over your usual spending or failing to pay the full balance can still lead to negative reporting and impact your relationship with Amex, even if it doesn't directly hit your credit utilization ratio.
3.3 Length of Credit History: Patience is a Virtue
The longer you maintain your American Express account in good standing, the more positively it impacts your credit score.
Building Longevity: An old, well-managed Amex account demonstrates a long history of responsible credit use, which is highly valued by credit scoring models.
Avoid Closing Old Accounts: This is why it's generally advised not to close your oldest credit accounts, even if you don't use them frequently, as it can shorten your average credit age.
3.4 Credit Mix: A Diverse Portfolio
Having an American Express card can contribute positively to your credit mix, especially if it adds a new type of credit to your report (e.g., your first charge card or a premium travel card). Lenders like to see that you can manage different kinds of credit responsibly.
Step 4: The Role of Authorized Users
Adding an authorized user to your American Express account can also have an impact on their credit score (and potentially yours).
For the Authorized User: If you are added as an authorized user to an American Express account that is managed responsibly (on-time payments, low utilization on credit cards), this positive payment history will often appear on their credit report, helping them build or improve their credit score. This is a common strategy for parents to help their children establish credit.
For the Primary Cardholder: Adding an authorized user does not directly impact the primary cardholder's credit score. However, the primary cardholder remains solely responsible for all charges on the account, so any irresponsible spending by the authorized user (if not paid off) can negatively affect the primary's credit.
Step 5: Potential Pitfalls and How to Avoid Them
While American Express can be a powerful tool for building strong credit, there are pitfalls to be aware of.
5.1 Late Payments and Defaults
As mentioned, late payments are the biggest credit score killer. Missing a payment by 30 days or more will be reported to the credit bureaus and significantly damage your score. Defaults or accounts going to collections are even worse.
5.2 Excessive Spending and Debt
Even with charge cards that don't have a preset limit, responsible spending is key. Running up huge balances that you struggle to pay off, even if it's not reflected in your utilization ratio, can signal financial trouble to Amex and potentially lead to account closure or other negative actions, which can hurt your score. For credit cards, maxing out your limit will send your utilization soaring and severely impact your score.
5.3 Closing an Account
Closing an American Express account, especially an old one, can have a negative impact on your credit score.
Decreased Available Credit: If it's a credit card, closing it reduces your total available credit, which can increase your credit utilization ratio on your remaining cards.
Shortened Average Age: It removes a potentially long-standing account from your credit history, shortening the average age of your accounts.
Consider Alternatives: Before closing an Amex card, consider if there's a no-annual-fee option you can downgrade to, or if keeping it open with minimal use (but consistent on-time payments) would be better for your credit.
Step 6: Leveraging American Express for Credit Growth
To truly maximize the positive impact of American Express on your credit score, embrace these habits:
Always Pay On Time (or Early!): Set up automatic payments to ensure you never miss a due date.
Pay Your Balance in Full: For charge cards, this is a requirement. For credit cards, paying in full every month keeps your utilization at 0% and saves you money on interest.
Monitor Your Credit Report: Utilize services like American Express's MyCredit Guide (or free annual credit reports from AnnualCreditReport.com) to regularly check for errors and track your progress.
Don't Apply for Too Much Credit at Once: Space out your credit applications to minimize the impact of hard inquiries.
Maintain a Long Relationship: The longer you responsibly use your Amex card, the more it will benefit your credit history.
By diligently following these steps and understanding the nuances of how American Express reports to credit bureaus, you can harness the power of your Amex card to build and maintain an excellent credit score. It's a journey of financial discipline, but the rewards are well worth it!
10 Related FAQ Questions
How to build credit with American Express?
To build credit with American Express, consistently make on-time payments, keep your credit utilization low on credit cards (if applicable), and maintain the account for a long period.
How to get an American Express card with fair credit?
While many Amex cards require good to excellent credit (typically 670+ FICO), some entry-level or cash-back cards might be attainable with a fair credit score (mid-600s). Prequalification can help determine your eligibility without a hard inquiry.
How to check your credit score with American Express?
American Express offers a free service called "MyCredit Guide" which allows cardmembers to access their Experian credit report and FICO Score 8.
How to improve your credit score with an American Express charge card?
Charge cards don't affect credit utilization, so focus on making full, on-time payments every month. This builds a strong payment history, which is the most important factor in your credit score.
How to remove an American Express hard inquiry from your credit report?
You cannot remove a legitimate hard inquiry from your credit report. It will automatically fall off after two years. Only inaccurate inquiries can be disputed and removed.
How to increase your credit limit on an American Express credit card?
You can request a credit limit increase through your American Express online account or by phone. Amex may also offer automatic credit limit increases based on your responsible usage.
How to get a higher credit score after applying for an American Express card?
After applying, focus on responsible usage: pay bills on time and in full, keep credit utilization low, and avoid applying for other credit in the short term. The temporary dip from the hard inquiry will naturally recover.
How to close an American Express account without hurting your credit score too much?
If possible, avoid closing your oldest accounts. If you must close an Amex card, ensure all balances are paid off. Be aware it may slightly decrease your overall available credit and average account age.
How to become an authorized user on an American Express card for credit building?
Ask a trusted primary cardholder (who has excellent payment habits) to add you as an authorized user. The positive payment history of their account will then typically be reported to your credit report.
How to manage American Express payments to optimize your credit score?
Always pay your full statement balance by the due date. For credit cards, try to pay more frequently than monthly if you carry a balance, to keep your utilization reported lower. For charge cards, ensure the full balance is paid monthly.