Credit Utilization

Credit utilization is one of the big factors that credit scoring models look at. Credit utilization is calculated by your current balance versus how much percent of your available credit or credit line was used. The higher the percent of your credit line you spend, the higher your credit utilization will be, and the more will it affect your credit score. But when it comes to charge cards, like the American Express Gold and American Express Platinum credit cards, there’s a problem in that these charge cards don’t have a preset credit limit. So the question that we will discuss in this post is: how does Fico calculate credit utilization in regards to charge cards?

The Old Method

In the past, Fico used to use the highest balance within the last 24 months as the credit limit. Based on that amount, they used to calculate the credit utilization. For example, if your highest balance you had on a charge card was $10,000 and in the last month, you spent on the same charge card $5,000 you’re credit utilization would be 50%.

The problem was that if someone had the same spending pattern every month, then his credit utilization would always be maxed out or close to maxed out and his credit would be killed.

The New Method

In the last year or so Fico has announced that charge card balances will not anymore be factored into credit utilization calculations. This basically means that having a high balance on a charge card will not affect your credit utilization any longer.

But please keep in mind that a high balance on a charge will still affect your overall high credit usage, which is also a factor in the Fico scoring model.

Do Not Get Too Excited

It is important for you to know that even if Fico changed the way they will calculate charge card utilization on their new models. Unfortunately, when it comes to mortgages and some auto loans the old Fico versions are still used. Therefor (at the time when applying for a mortgage or auto loan), using a personal charge card (not business) will still affect your credit utilization (as explained above).

Which Credit Cards Are Charge Cards

At this time American Express is the only major credit issuer for charge cards.

The following personal credit cards are charge cards:

  • Amex Gold (personal and business)
  • Amex Platinum (personal and business. including the co-branded Platinum credit cards-Mercedes Benz, Morgan Stanley, Goldman Sachs, etc)

If you have any of these credit cards (personal only), be careful when using them before you apply for a mortgage or auto loan.

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