How does canceling an American Express Card effect your credit score?

A reader, Jared, had this question:

I am thinking about canceling my American Express Green Rewards charge card. I have had it since 2004.

I don’t use it anymore and I don’t like paying the annual fee (it keeps increasing anyway). The card has no balance (as I pay off the balance every month).

I want to know if canceling that charge card will hurt my credit score. Extra information: I do have an American Express Blue card that I use regularly. I like the fact that it has a rewards program with no annual fee. Any advice will be appreciated!

Jared

Jared,

The general rule of thumb is pretty simple: Closing out a credit account hurts your credit score. American Express however, doesn’t fit the general rule. Here’s why:

Visa and MasterCard report both your limit, and how much you charge to the three credit bureaus each month. American Express on the other hand, has no preset limit, and so it only reports how much you charge.

The credit bureaus take that reported amount and list it as your limit for that month. So, when you use an American Express card, it can typically look as though you are maxing out your credit card each month – even if you aren’t coming anywhere close to your actual limit.

An Example:

Say you had around a $20,000 limit on your American Express each month. But you only charge $2,000. Well, American Express only reports the $2,000 you charged to the credit bureaus.

The credit bureaus in turn say “Well, we know that he was allowed to borrow at least $2,000 so we’ll just use that as the default amount for his limit.”

Now, let me be clear; how much of your credit limit you use each month accounts for 30% of your credit score. So, even though you may appear to be using all of the credit available on your Amex it rarely actually hurts your credit score. It just doesn’t help to raise it.

That being the case, closing out an Amex card is going to be a little different too. How many credit cards do you have? If you only have the two Amex cards, and nothing else, then you should leave it open.

What if you have more than just those two American Express Cards?

If you have several other credit cards that are not close to their limits, then you should be able to close out the Amex account without a problem.

Since American Express does not report a credit limit for you each month, closing the account will not effect your debt-to-credit ratio (that 30% we talked about earlier.)

Best advice: If you only have the two Amex cards, keep your account open. If you have several Visa or MasterCards that are not charged up, feel free to close the account.

For a better understanding of FICO scores, and how closing that account will impact them, you can check out this article:

Don’t forget that if you want to keep the account open, you can always call and ask them to remove the yearly fee. Simply tell them that you want to close the account unless they are willing to waive the fee. You don’t have anything to lose with that.

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This entry was posted on Friday, April 3rd, 2009 at 07:48 and is filed under Credit Score Repair FAQ. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.