Dear Liz: I’ve followed your advice on building credit and now, at 20, have credit scores around 730. I recently applied for and received an American Express gold card. But I’ve read that charge cards can hurt your credit score, or at least not help it. Should I use this card?
Answer: Charge cards require you to pay your balance in full every month, unlike credit cards that allow you to pay only a fraction of what you owe. You typically need good credit scores to qualify for a charge card, and it can be an excellent way to manage your finances without incurring debt.
The concern with charge cards used to be that they didn’t report credit limits. Unlike credit cards, charge cards typically don’t have preset spending limits. Without a reported credit limit, credit scoring formulas often used the highest reported balance as a proxy. If you charged about the same amount every month, it looked to the formulas as if you were using most or all of your available credit.
But the most recent versions of the FICO — the credit scoring formula used by most lenders — now make allowances for charge cards. The amounts you charge on your gold card won’t be factored into the FICO’s credit use calculations, but having and using the card responsibly will still benefit your scores.
Congratulations, by the way, on achieving good credit scores so young. If you continue to manage your credit responsibly, you can save hundreds of thousands of dollars over your lifetime in reduced interest rates and lower insurance premiums.
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