How does the credit scoring formula look at charge cards?

This post originally appeared March 15, 2018 on as “Can adding authorized user to charge card help them build credit?

By Barry Paperno

Dear Speaking of Credit:
I’m adding an authorized user to my American Express Gold to help this person rebuild credit – and for me to earn rewards.

However, this card does not have a preset limit. Does this even help improve this person’s FICO credit score? Or will it hurt the authorized user’s credit because there will not be a debt-to-credit ratio?

There will only be a high balance indication. And this person does not have any other credit line out there.

Dear Megan,
Good question. And good idea adding an authorized user whose additional card use can help generate enough additional rewards points to make that American Express Premier Rewards Gold card worth the $195 annual fee (after a free first year).

Yet, while helping you accumulate those points, I understand your concern over the card’s impact on the authorized user’s credit score, especially since this authorized user doesn’t have any other open “revolving” credit.

We’ll focus on why this lack of available credit matters and how this American Express Premier Rewards Gold card, and other “charge” cards, do and do not help authorized users’ credit scores.

What is a charge card?
First, what is a charge card? And what makes it different from a credit card?

There are two major types of credit that appear on credit reports and in credit scores – revolving and installment – with a third, less common, type known as “open” credit.

While credit, store and gas cards help make up the revolving credit category, and installment credit consists of mortgage, auto, student and personal loans, open credit refers to the charge cards that behave a little differently.

As note of caution for this discussion, you’ll want to avoid confusing the open “type” of credit with the open (versus closed) “status” that can apply to any type of account.

These three credit types work quite differently from one another in that:

  • Revolving credit allows a cardholder to charge purchases up to an established limit and either pay in full within a grace period or carry a balance from month to month.
  • Installment loans typically allow a fixed borrowed amount to be repaid with set monthly payments over a specific time period.
  • Charge cards, as you noted in your question, come with no preset credit limit and are required to be paid in full within 30 days of the statement date.

Out of the five categories that are factored in to make up your credit score, types of credit – also known as credit mix – carries the least importance, amounting to 10 percent of your score. The other factors include payment history (35 percent), amounts owed – also known as credit utilization, amounting for 30 percent of your score – length of credit history (15 percent) and new accounts or new credit (10 percent).

However, credit scores like to see at least one open revolving account and one installment account to demonstrate recent experience managing credit under different circumstances.

The payment record and length of history calculations on a charge card can be critical for your score, just as they are for any other card or loan. That said, carrying a charge card is never necessary to achieve a high score.

Charge cards are not included in utilization calculations
This leads us to why the authorized user’s lack of any revolving credit matters in this situation.

We all know that rising revolving debt, as reflected in higher utilization percentage, can be bad news for your score – just as having no recently reported open revolving credit can also be a hindrance.

This is why your suspicion that the American Express charge card won’t help overcome the authorized user’s lack of a “debt to credit ratio” is valid, since charge card balances are excluded from utilization calculations.

How charge card can help authorized user’s credit score
Still, while this charge card won’t solve the lack of revolving credit problem, there are other ways a charge card can help an authorized user’s score. Let’s look at three of them:

  • For an authorized user whose credit report includes some accounts with past late payments, adding any credit account with a spotless pay record can add points to the score by raising the ratio of good (paid on time) to bad (paid late) accounts.
  • For score calculations measuring the length of time the authorized user has been using credit, a well-aged charge card can do as much good as any other account of the same vintage.
  • Should the authorized user obtain a credit card at a later date, using the charge card for large purchases can protect the credit score by keeping such high dollar amounts out of the utilization calculations entirely.

Adding user to credit card can help boost score
As a recommendation then, why not also add one of your lowly utilized credit cards, assuming you have one, to this authorized user’s credit report and score in the same way you’re adding this American Express charge card?

That way, the authorized user can help you rack up rewards points while you help the authorized user rack up score points. A great deal for both of you!

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