Photo: 401(K) 2013
The ad phrase “no preset spending limit” (NPSL) can be more than a bit confusing. You might have seen commercials for cards without preset limits and wondered, “No limit? What if I run up a $50,000 tab and don’t pay?”
In truth, NPSL cards do have a de facto limit on spending. The card carriers refer to this as your “credit line” or “revolving line.” If this makes you a little confused, do not feel ashamed. The legalese for many of these cards is particularly obfuscating.
Take, for example, this snippet from a Bank of America Visa Signature card agreement:
Important Notice: This credit card has no pre-set spending limit. This does not mean that all transactions will be approved. We will consider transactions for approval on an individual basis, including transactions in excess of the Revolving Line (referred to above as your Credit Line).
What does that mean? That means that any transaction you try to make above your credit line are up to the whim of your card issuer.
Let’s say you’re following along behind a truck transporting bowling balls on the highway, and a loose bit of cargo flies to the road and beneath your car, where it wrecks your oil pan. Your engine seizes in seconds!
If you find yourself needing to charge $3,000 to get the garage started working on your engine and other repairs while the insurance company investigates your claims, you might find yourself out of luck. Whether or not the transaction is approved is up to the card issuer, and the decision is made at the point of sale.
If you’re thinking about a credit card with no pre-set spending limit, a new study might cause you to think twice. The study shows that the tricky reporting methods used by companies who issue these cards can lower your credit score.
30% of your FICO is based on what is called credit utilization, the amount of available credit you have compared to how much you use. In others, this portion of your credit score compares your available limit on cards to the amount you typically charge.
The more you charge, the more that amount approaches your credit limit, the higher your credit utilization, and the lower your FICO score will become. To maintain a good credit score, you want to maintain low credit utilization.
In other words, you want to keep your credit card spending from approaching your credit limit. This is easier said than done with NPSL cards, because while your spending is not unlimited, the cards do not have a typical limit.
Instead of reporting limits, these credit card companies typically report either the highest balance reached over a certain period, or the credit line or revolving line affixed to the account. The problem arises because companies do not disclose this amount to cardholders.
Most companies wish to maintain the illusion of a card without a spending limit, and thus generally do not tell a consumer their credit line limit. Worse, card issuers can use any reporting method they wish, and can change their method at any time, resulting in unpredictable reporting. This can make it very difficult for a cardholder who wishes to keep their spending well below the limit their card issuer reports to credit bureaus.
Consumers who like having an NPSL card should continue using it only if they can make sure that their reported credit utilization remains low. This is practicable when no credit limit is reported, or when a revolving limit is reported and you are careful to keep your spending below this amount.
According to a study by Cardhub.com, credit card issuing banks who follow these standards include Chase, Citi, Capital One, USAA, Wells Fargo, and the Bank of America, which issues an NPSL MasterCard. In the end, the consumer principles surrounding NPSL cards are very similar to those of all credit cards and financial services: consider how the card will benefit you, shop around, and always read the fine print!