Throughout the Great Recession and its aftermath, much has been made about predatory credit card practices. We have all heard about the unscrupulous issuers, devoid of social responsibility, who misled their customers for profit and helped lead the American economy into a valley. The majority of the time, it seems that it’s people with damaged credit or those new to credit who fall prey to such practices. Consumers with excellent credit generally believe themselves to be immune. However, No Preset Spending Limit (NPSL) credit cards represent a contradiction to that belief as well as a credit option that can both mislead consumers and damage their credit standing, all because of lacking industry uniformity and transparency.
There are three notable types of NPSL cards currently on the market: an American Express charge card, a World MasterCard credit card and a Visa Signature credit card. The American Express NPSL card is a charge card that has a maximum spending amount, though it is not relayed to consumers. The MasterCard and Visa options are credit / charge card hybrids that have a revolving credit limit which consumers are encouraged to exceed as long as they bring their balance below it by the end of each month. They cannot, however, surpass it by an unlimited amount, though the excess allowed is also not made known to consumers. Thus, it is obvious that users are somewhat in the dark with NPSL cards simply because they do not know how much they can truly spend using such cards. Ultimately, this issuer-bred ignorance creates the potential for one’s card to be unexpectedly declined.
While clear credit limits are important to consumers for practical purposes, they are also integral to the determination of credit scores. FICO—the largest credit scoring agency in the United States—uses a balance-to-available credit ratio, known as credit utilization, as part of its credit score calculation. This credit limit-dependant factor serves as part of the “Amounts Owed” section that comprises 30% of one’s FICO score and should be kept as low as possible.
Confusingly, however, despite the fact that NPSL cards do effectively limit consumer spending, their true credit limits are not reported to credit bureaus. Doing so would ruin the illusion of unlimited spending propagated by NPSL card issuers, thus, proxy limits are reported. According to a No Preset Spending Limit Study conducted by CardHub.com, credit card companies report the revolving credit limit, or the highest balance reached on a card during a certain time period or nothing at all for the credit limits of their NPSL cards.
Each method of reporting has a different effect on one’s credit utilization. If a revolving credit limit is reported and a consumer spends more than it—which is actively encouraged by the issuer—credit utilization will be 100 percent, thereby affecting that person’s credit score negatively. Similarly, if a high balance is reported, credit utilization will also likely be 100% because most people’s spending does not generally fluctuate radically from month to month. Finally, if a limit is not reported or a card is considered an open line of credit, that card will not be included in credit utilization calculations.
Such reporting variety becomes especially important in light of the Card Hub study because it also revealed both that issuers do not use consistent reporting techniques and that many refuse to be upfront about the methods they actually use. This operating opacity prevents consumers from mitigating the potential negative effects of NPSL cards on their credit utilization and actually represents a reason not to use them.
In the end, NPSL cards represent, in a sense, credit roulette. In using them, consumers are basically gambling their credit scores because even responsible spending with an NPSL card can lower one’s credit standing. Therefore, if you are unable to both determine how your NPSL card’s credit limit is reported and confidently manage your credit utilization in a way that prevents harm to your credit score, avoid using such a card. All you stand to gain with an NPSL card is a false sense of unlimited spending, while the drawbacks could possibly be much more significant.
Disclosure: Some of the links within this article point to CardHub.com, which is owned by the same parent company as Wallet Blog.