But the main thing you should watch out for if you happen to qualify for one of these cards is the impact it could have on your credit score. Now you may think that because it has no limit it wouldn't matter how much balance you carried because there would be no ceiling to which you be measured against.
Nearly everyone knows that your credit score goes down if you carry a balance that comes close to your limit. What you may not be aware of is that even when you don't have a limit, the good folks at FICO still measure that balance against other factors and a high balance can definitely impact your score.
This all came to light when CardHub.com compared the original "no limit" black card from American Express to similar cards offered under the brand names Visa Signature and World MasterCard. Cardhub learned that each card can affect your credit scores in different ways. They can depress your scores, have little impact, or even raise them. How's that for confusing. Moreover, there appears to be no good way to predict the impact on your credit score.
CardHub CEO Odysseas Papadimitriou recommends you avoid the no spending limit card because you don't know how damaging it can be. He adds that the "no limit" designation is an illusion. He says a more realistic term should be "no disclosed limit."
Things get murky
Fair Isaac Corporation is the company that developed the FICO credit scores. It says two key factors in determining a person's credit score are the "amounts owed category and credit utilization, or the ratio the amounts owed over the amount your creditors are willing to lend. Add up all your balances and all your limits, and you know your overall ratio. So how do they compute a ratio if there's no spending limit?
The answer to that question is where things get murky. CardHub says "no limit credit cards from American Express, Chase, and Citibank will not directly affect your credit-utilization ratio under Fair Isaac's latest "FICO 8" model. But four other banks' versions of the cards could. And even they don't do so on a consistent basis.
Papadimitriou claims you need to understanding the Visa Signature and World MasterCard are based on ordinary credit cards, with a limit on revolving credit -- the term for the portion of the balance that you can postpone paying in return for incurring interest.
Basically, he says they took a normal credit card, and they tried to retrofit it into a no-preset-spending-limit model. The result is that issuers openly encourage cardholders to exceed their revolving limits each month. At the end of the month, they just have to pay off enough to keep below their revolving credit limit.
Papadimitriou says the card issuers want you to overspend and while they may not hit you with any fees, but your credit score could suffer. In fact, CardHub says so-called "no limit cards from Capital One and Wells Fargo have revolving credit limits as an actual credit limit. So does Bank of America for its World MasterCard customers.
With these cards, Papadimitriou says, you can appear maxed out to the FICO credit-scoring folks even when you think you have plenty of room left to spend.
Bank of America substitutes a "high balance" - the cardholder's highest balance over some period - as a credit limit for its Visa Signature customers. Whether or not those customers will look maxed out will depend on their spending patterns and for some reason big swings could actually improve your credit score.
To further confuse the matter, Fair Isaac admits that some lenders are still using older FICO models when they compute credit scores. And consumers may suffer indirect effects as well, if significant portions of their spending or available credit are reported unconventionally.
To shed some light on this shadowy world, the New York Times got Fair Isaac to issue a statement saying if one of these cards is reported as an open account, it will not be factored into the FICO's calculation of credit utilization and, thus, wouldn't affect a credit score. But if an issuer reports the card as actually a revolving account with a credit limit or the highest balance within a certain time period, the utilization ratio on the card could potentially be very high and have a negative impact on a consumer's credit score - especially if the consumer spent more than the limit and or had a high balance on the card.
The FICO statement cautioned, however, against assuming that just because a card with no preset limit is included in utilization calculations, it will automatically have a negative impact on a credit score. The ultimate score, the statement said, depends on a particular person's credit profile. That includes how the utilization ratio of the "no limit card compares with that of a person's other cards. For example, if you have a low utilization ratio on the no preset limit card, then the FICO score could benefit from the card being included in the calculations. But the reverse scenario applies as well. There are cases where including the no preset limit card in the utilization calculation could increase the overall ratio, and have a negative impact on the credit score. Therefore keeping low balances on these cards is the best way to ensure they will have a positive impact on a FICO score.
CardHub.com recently released a study showing the American Express, Chase and Citibank received "good ratings, while Bank of America, Capital One, Wells Fargo and USAA received "fair ratings." The full results can be viewed on www.cardhub.com.
