No-Preset-Limit Credit Cards Could Spell Trouble for Your Credit Score

No Limit Credit CardsNo-Preset-Limit Credit Cards Could Spell Trouble for Your Credit Score

If you are new or unschooled in the world of credit cards, you are more than likely confused, unsure of yourself, and more than a bit scared. And you have every reason to be, especially if you haven’t done your research. After all, banks and credit card companies are most concerned with their bottom line, and it is in their best interests that they set forth plenty of fine print that, they hope, you’ll skim over quickly.

One type of credit card that sounds great in theory but is probably not the best idea is the no-preset-limit credit card. The no-preset-limit credit card has quite a deceiving title, because the name alone implies that you have no “limit” — you can spend however much you want, and you won’t get in trouble as long as you make your payments on time. In fact, in many circles, no-limit credit cards as seen as a valuable perk among the other perks associated with credit cards generally, accruing a certain level of status to those cardholders who are convinced that it is a good idea.

However, before you begin thinking about obtaining a no-preset-limit credit card, it is absolutely essential that you learn all the intricacies of what is entailed when you apply for and are approved for one.

Credit Utilization and How it Affects Your Credit Score

Although credit scores can at times seem like a mysterious calculus that you can do nothing to affect, there are several steps you can take to ensure that your credit score stays good, if it is currently decent, and even more that you can do to improve a bad score. After ensuring that you pay all your bills and payments on time or early, the most important factor according to the Fair Isaac Corporation (FICO) — the main company that calculates the scores and provides consumers and lenders with the analytics — is your credit utilization. FICO indicates that credit utilization, as part of your “amounts owed,” accounts for 30% of your credit score, while payment history accounts for 35%. As such, making sure this component of your credit score is up to par is absolutely instrumental, since it counts for nearly a third on your credit report.

Now you may be wondering what, precisely, credit utilization is. Credit utilization is industry jargon for the proportion of how much credit you are actually using to how much credit is available to you. To use an example, say that you apply for and are granted a credit card with a limit of $25,000. If you use $4,000 on this card specific card, then your credit utilization ratio is 25%. If you max out a card, your credit utilization is 100%. The general idea is that the lower the percentage of your credit utilization, the better your credit score will be.

Different Types of No-Preset-Limit Cards

As established earlier the “no limit” moniker is quite deceptive. Every credit card has a limit. The no-preset-limit (NPSL) cards are just better at hiding this limit. In the world of NPSLs, there are generally two types:
  • Charge Cards

With charge NPSL cards, consumers are allowed to spend up to a specific, though undisclosed limit. Any remaining balance must be paid in full by the month’s end.

  • Credit/Charge Hybrid Cards

These hybrid NPSL cards are different in that their credit limit is revolving, and consumers are actively persuaded to surpass this limit as long as they pay back the extra money spent by the end of the month.

No-limit Cards Can be Tricky

Now that you know the two main types of NPSL cards, it is important to know how credit utilization comes into the mix.

Since FICO and credit bureaus cannot discern a specific limit on an NPSL you may have, it is very difficult for them to calculate your credit utilization. In lieu of a specific credit limit, credit-scoring companies will not calculate the credit utilization, in which case the credit utilization percentage automatically becomes 100%. Often, credit scoring companies will allow using the highest balance on a card as the credit limit. For example, if your highest balance on your NPSL was $5000, then this number becomes the card’s “limit.”At the same time, however, banks and other issuers will often not report your highest balance. And it is precisely this practice that can ruin your credit score.

Of course, there are perhaps some instances in which NPSL cards can be helpful, if you are willing to take on the risk. Also, not all NPSLs were created equally, and some are better than others, as a Card Hub study indicates. But the most important thing to remember is that having limits can be a good thing. Although NPSLs are marketed as having no limits, read the fine print. To give one example, here’s what is noted on the application for an American Express NPSL card:

“No pre-set spending limit does not mean unlimited spending. Purchasing power adjusts with your use of the card, your payment history, credit record and financial resources known to us, and other factors.”

You’ve been warned — think carefully before filling out that application.