Beginning in 2011, I worked for a solid year to pay down the lingering debt leftover from my first few years struggling in New York and shore up my credit score.
By last fall, I was ready to take on a new, higher line of credit, and I had one goal in mind: Using it as a tool to build my credit history and keep improving my credit score.
It's been five months and I have finally realized what a huge mistake I made.
First, what you have to understand is that a large part of your credit score is based on how much debt you are carrying vs. how much available credit you have.
It's ideal to pay it off each month and have a picture-perfect zero balance, but generally, experts say somewhere between 10 to 30 percent utilization is fine.
When I was approved for a new Bank of America cashback card in October, my limit was quadruple that of the other credit card I carried. It would be easy to stay within 10 percent of my available credit if I only used it for groceries and paid it off each month .
With the combination of a low utilization score and on-time payments, my credit score would improve, and I would earn cash back in the process.
That was the plan anyway.
When I got my free annual credit report last week, I realized for the first time that my new credit card was not reporting a credit limit at all. It just said 'N/A' on my credit report.
I wanted to figure out why, so I called up Bank of America. I spent at least three hours playing phone tag and speaking with six different representatives before I found an answer.
I was the proud owner of a 'No Preset Spending Limit' Visa Signature card.
'No preset spending limit' is a special breed of credit card perks that has grown in popularity as lenders have looked for new ways to lure in customers. It's generally reserved for customers with solid credit.
With that kind of card, the credit limit my bank had given me was more of a suggestion than a rule. If I were to go over that balance, they wouldn't penalize me and, since they don't report that limit to credit bureaus, I supposedly wouldn't take a hit on my credit score.
It's not exactly a blank check. A BofA rep I spoke with wouldn't give me a firm number, but he said they have the right to review and decline any purchase that goes over my "limit."
Here's why I'm worried.
The bank made it sound like I should be glad they wouldn't report overspending to credit bureaus. But that presents a whole other problem.
Credit bureaus have to come up with a credit utilization number in order to calculate your score, you see, so when they see that a card has no limit, they, for some bizarre reason, just use your highest balance (that is, the largest amount of cash you've charged to the card at one time) as a limit instead.
Example: Say you have a credit limit of $10,000 with your bank, but the highest balance you've ever carried is $5,000. Since your bank doesn't report a credit limit to credit bureaus, the bureaus will simply take that high balance of $5,000 and use it as your limit –– not the $10,000.
Now, if you spend $2,500 on that card, the credit bureau will think you're using a whopping 50% of your available credit, when you're actually only using 25%. That can seriously hurt your credit score.
Because my high balance has never been that big, credit bureaus have been treating me as if I'm taking on way more debt than I actually am.
And there goes my brilliant plan to build up my credit score.
How to fix this:
Create your own limit. John Ulzheimer, President of SmartCredit.com, says some customers have come up with a clever way to get around this. They will "create" their own limit. That means they might charge $10,000 to their card and let the bureau take that "high balance" number as their limit. Then they pay it off immediately and go about using the card as normal.
The problem: It's hard to accomplish unless you've got a lot of spare cash lying around.
Downgrade your credit card. Here's the option I chose. Bank of America allowed me to change my card from a Visa Signature card to a Platinum Plus. Platinum Plus limits are firm and are reported to credit bureaus. They transferred all of my account information (including my points and such) to the new card, which I can still use as a cashback card. Since my goal is to keep building up my credit and I only have one other major credit card with history, this was the best option for me. I was also assured I could switch back to a Visa Signature card if it ever struck my fancy.
The bottom line:
No preset spending limit credit cards do offer flexibility in times of emergencies, but I find them a little scary. What if you go over your limit and can't pay it off straightaway? You'll wind up paying a boatload in interest until you do. And sure, you could charge something really expensive and pay it off immediately in order to get the cashback bonuses. But if someone were really using credit for an emergency, chances are they won't have that kind of cash lying around.
Why else would they be using credit?
More From Business Insider
- How America's Credit Reporting System Gets Away With 40 Million Mistakes
- 13 Things You're Better Off Buying Used
- How A Family Of Four Manages To Live Well On Just $14,000 Per Year
- credit score
- credit bureaus
- credit card
- Bank of America