As I teach in my Financial Health 101 Seminar, one determinant of your credit score is how much of your credit you are using or your “credit utilization”. The simplest example would be you only have one credit account, a Visa with a $10,000 maximum, and you carry a $1,000 balance. This would be 10% credit utilization. Pretty straightforward, right? Not always. Many people carry charge cards that do not have a pre-set spending limit and these can hurt your credit score.
During a break at a recent seminar at a law firm in Manhattan, an attorney asked me how his no limit American Express would affect his credit score. Because his American Express has no pre-defined spending limit, how did American Express report his credit usage to the credit bureaus? The answer is, charge cards report the highest amount ever charged monthly on the card to the credit bureaus as your credit limit. This typically results in a high credit utilization, effectively lowering your credit score. For example, if the most you have ever charged on your AMEX in a month is $2,000 and you typically carry a $1,000 balance this is a 50% credit utilization. Compare this to your 10% utilization on the VISA with a $10,000 limit.
Moral of the story, charge cards are detrimental to your credit score!