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Are No-Limit Credit Cards Bad for Your Credit?

Barry Paperno

While you may not have heard of “no preset spending limit” (NPSL) cards, you may be carrying one right now if you have a VISA Signature or World MasterCard.

NPSL cards were introduced a few years ago to provide consumers with a single “hybrid” card that combines the features of a credit card (where you can charge up to an established credit limit and either pay off the balance or make minimum monthly payments) with a charge card that carries no established credit limit, but the balance must be paid in full each month.

Convenience, along with generous rewards points programs, concierge services, purchase protection, extended product warranty and other features have made NPSL cards some of the most popular credit cards available to high credit scoring — low risk — consumers. However, card issuers have been notoriously inconsistent in their reporting of NPSL accounts to the credit bureaus, and as such, with these cards comes the uncertainty of not knowing just how your credit scores will be impacted if you were to apply for a NPSL card, or are upgraded to one from an existing card.

[Related Article: The First Thing to Do Before Applying for a Credit Card]

What follows are some examples of the various ways in which NPSL accounts appear on credit reports, which, of course, determines how they affect credit scores:

  • A NPSL account will typically — though, not always — appear on a credit report as a “flexible spending credit card.”
  • A credit limit is likely to be reported for the account, despite the “no preset spending limit” claim.
  • A NPSL account is likely to be reported to the credit bureaus as either a “revolving” type account (like a credit card) or an “open” line (like a charge card).
  • If no credit limit is reported, often a “high credit” (highest reported balance) amount is reported, and may be used by the scoring formula in place of the credit limit for any credit utilization (balance/credit limit ratio) calculations.

Other than the effects of late payments, which strongly impact any credit account under any scoring system, the biggest credit scoring concerns with NPSL cards tend to be related to credit utilization: the percentage of available credit that is being used. And depending on how the account is being reported, a NPSL card may or may not be included in utilization at all.

With this lack of credit reporting consistency, consumers simply do not have enough information to expect a NPSL to either help or hurt their credit scores; although, some general rules of thumb about the impacts of credit utilization on NPSL cards can be applied:

  • There should be nothing to worry about in terms of credit scores, as long as the utilization percentage on the NPSL and all other cards is low.
  • If the account type is that of a charge card — not revolving — the NPSL account will be excluded entirely from utilization calculations by the most recent versions of FICO scoring models.
  • Whether reported as a credit card or charge card, if no credit limit and high credit amount are present, the NPSL card will be excluded from all utilization calculations.

In short, if you are fortunate enough to have a high credit score with low or no credit card debt, an NPSL card can provide many benefits and might be the perfect card for you. Otherwise, it’s probably best just to steer clear entirely.

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