If you carry a classic American Express Green, Gold, or Platinum charge card, or any other credit card that has “no pre-set spending limit”, you probably know that no pre-set limit does not mean no limit. So how is your spending limit calculated, and what happens if you hit it?
I found out last month.
Classic American Express cards are charge cards, not credit cards, meaning the balance you charge on the card is due, in full, each month. AMEX makes its money on these cards by charging an annual fee and from the merchant fees it collects for each transaction.
Therefore, rather than designating a specific credit limit, American Express allows you to charge whatever it thinks you can afford to pay off each month, hence the cards have no pre-set spending limit. To clarify, many new American Express Cards like the Blue Cash and Everyday cards are credit cards with designated credit limits, not charge cards.
Last month I used my American Express Green Card for reimbursable expenses on a business trip, charging about $1,200 to the card over the ordinary personal purchases I make each month. Towards the end of the month I received a call and letter from American Express saying, it appears you are charing more than we anticipated, and therefore, new charges will not be approved until we receive payment. I had reached the card’s spending limit.
What sucked about this of course, is that the card shut down automatically without me knowing it. So I go to check into a hotel and the card was declined. That’s embarrassing. Of course the same thing could happen with a credit card, but at least you know where your limit stands and — as long as you’re paying attention — can know when you’re close.
How American Express calculates your charge card limit
American Express determines spending limits based upon your reported annual income and your payment history with their cards.
More specifically, a reader speculated:
Typically, your AmEx spending limit is three times your highest paid-in-full balance over the last six months. They are also pretty good about allowing you some flexibility if you call them ahead of time to inform them of pending charges (I’ve done this with $8,000 business expenses without any issues).
I haven’t had an American Express card for long, and this is the first time I have used it for business expenses, so it’s no surprise the amount of charges seemed high.
To avoid such a situation, expect to have a low credit limit when you start using a no pre-set spending limit card. Charge a bit to it the first month, pay on time, then charge a bit more each consecutive month.
If you want to make a large purchase with such a card, for example to earn rewards points, you can call the card to ask them if it will be approved before charging. Additionally, you can increase the charging power of your card at anytime by making payments more frequently than monthly.
Many people see “no pre-set spending limit” on American Express cards and other cards and think they can buy a car with that card, for example. Unless you have a six-figure salary and a history of charging tens of thousands of dollars a month and paying that balance each month, it’s unlikely your new car will be approved unless you provide documentation to American Express of having those funds available in some other account.
If you have excellent credit, you are more likely to get a large credit limit with a regular old credit card like any of these.
Why Amex Charge Cards can still be a good thing
Yes, they charge an annual fee when many credit cards don’t. Yes, they aren’t accepted everywhere. Yes, you don’t know exactly how much you can charge on them.
BUT: They are charge cards, not credit cards. Unless you explicitly ask to pay for a particular purchase over time, the balance is due each month, and you cannot incur new charges if your balance is unpaid or too high.
American Express charge cards are a great tool for people who need the convenience of a credit card but who have had trouble with credit card debt in the past. And, contrary to popular opinion, you don’t need spotless credit to get approved for the basic American Express Green Card (but you will need good credit).
American Express cards and your credit score
Having no derogatory info on your credit report helps, but if you have been denied credit cards for having too many high balances, you may still qualify for an Amex charge card (not their credit cards).
One final note: There is some thought that no pre-set limit cards aren’t great for your credit report because they do not report a credit limit.
If you have no other revolving credit accounts, or many revolving accounts that are at or near their limits, having an additional charge card on your report could be harmful. I think, however, that if you have one or two other credit cards with zero or low balances, an American Express card will not hurt you.
To be ultra safe, if you plan to apply for new credit, pay off your American Express card in full and don’t use it in the month before you apply for new credit.
Do you have any experiences with running into your Amex credit limit, or have you found an Amex card to be a helpful tool? I’d love to hear!