When Your Credit Card Hurts Your Credit Score

Certain types of cards can damage your reputation as a responsible borrower.

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If you have a Visa Signature, World MasterCard or Amex Charge Card, then your card is most likely classified as a No Preset Spending Limit (NPSL). You might think that means it gives you unlimited spending power. And who could blame you? Credit card companies themselves intentionally perpetrate this myth. However, spending is, in fact, limited with NPSL credit cards—an under-recognized fact that hurts consumers in numerous ways.

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There are two basic types of NPSL credit cards on the market today. First, there are NPSL charge cards—such as the American Express NPSL option—that allow users to spend up to a certain, undisclosed amount and require full balance payment each month. Then there are NPSL credit/charge hybrid cards which disclose a revolving line of credit that consumers are encouraged to exceed as long as they pay the excess amount by the end of each month.

Spending with such credit cards—offered by Visa and MasterCard—is ultimately capped at an unknown amount as well. If a consumer reaches his or her spending limit with either type of NPSL card, it will be declined. Thus, instead of unlimited spending NPSL offerings actually provide users the potential for their cards to be unexpectedly declined, which can be both embarrassing and logistically problematic.

However, this does not represent the extent of the prospective danger for consumers inherent within current NPSL credit card offerings. The way in which NPSL cards are reported to credit bureaus can prove very detrimental to consumer credit scores as well. FICO—the largest credit scoring agency in the United States—calculates credit scores by considering numerous factors about people’s credit history and current credit usage. One such factor is a balance-to-available credit ratio called credit utilization to which one’s credit limit is obviously very important. But if the credit limits for NPSL cards are unknown, how is credit utilization calculated?

NPSL card issuers do not report their cards’ true limits to credit bureaus because such information would then be public record and would destroy the illusion of unlimited spending. Thus, according to a No Preset Spending Limit Study by CardHub.com, they instead either report proxy limits—the revolving credit limit or the high balance held over a certain period of time—or simply refrain from reporting any limit at all. If the revolving limit is reported, credit utilization could reach 100 percent because—unlike with normal credit cards—credit card companies encourage consumers to exceed their revolving credit limits.

Similarly, if a high balance is reported, utilization will probably be around 100 percent because spending does not typically fluctuate too drastically. For instance, if you consistently spend around $2,000 each month, your highest balance will be close to that amount—say $2500—and typical spending will exhaust most of your “available” credit and lead to your credit utilization being around 80 percent every month.

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Theoretically, a consumer can mitigate the negative effects of credit utilization by adjusting spending to account for the way in which his or her card’s limit is reported. If an NPSL card is reported as an open line of credit, credit utilization is left out of the credit scoring process and is therefore not a concern; if a card’s revolving credit limit is reported, one could simply make sure to stay well below this amount; and if the high balance is reported, one could cease using an NPSL card altogether and move spending to a regular credit card. However, making such an adjustment would require knowing which type of proxy limit is reported for a given credit card, and according to the Card Hub study, no uniformity exists in how credit card companies report their NPSL options. Similarly, many issuers refuse to be transparent in disclosing their particular reporting methods.

It follows then that consumers can damage their credit during the course of normal, responsible NPSL card use. Therefore, use of such a credit card is ill-advised because it is simply not worth the hassle or the stress. After all, what do NPSL credit cards really have to offer relative to regular credit cards besides a false sense of unlimited spending?

Odysseas Papadimitriou is chief executive and founder of CardHub.com, an online marketplace for credit card offers and gift card exchange.