Most people who have a credit card are aware of their credit limit. But lately issuers have been providing some cards with No Pre-set Spending Limit (NPSL), which sounds like a good card to have.
Plenty of credit experts say it isn't.
The problem with unlimited credit is how it affect your credit, or FICO, score. CardHub.com produced a study of NPSL cards and how they dragged down FICO scores. The problem, they found, was in how these card issuers determined "credit utilization," a key part of the credit score.
The study also found:
- The way that most issuers report NPSL cards often creates high utilization ratios on these accounts.
- The credit card companies that were least transparent in disclosing this information were U.S. Bank and HSBC. These issuers declined to answer questions related to the study even though this information is readily available to their competitors.
- NPSL cards lack the predictability of traditional credit cards, and therefore consumers who use these cards run the risk of being declined at point of sale when making large purchases.
The issuers who have NPSL cards that get reported in a way that do not affect the credit utilization ratio that FICO uses are Chase and Citi.
The credit reporting drawbacks of these cards, coupled with the fact that No Pre-Set Spending Limit does not mean unlimited spending power as the name suggests, make these cards much more of a hassle than traditional credit cards, the study concluded.
"Consumers who use these cards are not able to manage their accounts the way they can with traditional credit cards, making them vulnerable to hits in their credit scores," the authors wrote.
Because a NPSL card does not have a credit limit, it makes it difficult to determine a consumer's credit utilization ratio, which is an important variable in calculating consumer credit scores. The credit utilization ratio is the percentage of available credit that a consumer uses.
According to FICO, the "Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)" is factored into the "Amounts Owed" portion of a consumer's score, a portion that counts for almost 30 percent of the total score.
The study says this confusion is compounded by the fact that each credit card issuer reports NPSL credit cards differently to the credit bureaus. In order to understand how the NPSL cards from different issuers affect customers' credit scores, the website contacted representatives from the 10 largest credit card issuers, based on outstanding balances. It also contacted a representative from FICO to understand what information FICO uses to calculate utilization ratios.
"Based on the results of these inquires, we found that not all NPSL cards are included in the credit utilization variable of consumers' credit scores," the authors write. "A FICO spokesperson confirmed that these cards are only included in the utilization ratio if their trade line is categorized as a revolving credit card and either a credit limit or high balance amount is reported. Additionally, if the account is reported as an open line of credit, as opposed to a revolving credit card, it will be excluded from utilization calculations."
The FICO representative explained that in the absence of a reported credit limit, FICO will look to the high balance to use as the 'limit' in utilization ratios. A high balance or high credit is the highest balance reported to the credit bureaus, sometimes within a certain time period and sometimes over the life of the account.
Is there any good reason to have a NPSL card? It depends. Some NPSL cards offer attractive rewards, like generous air miles, and include perks not available on other cards. Still, those benefits should be weighed against a possible hit to your credit score.