People with excellent credit should not only get perks and rewards with their credit cards, but they should also be highly sought after and catered to by credit card companies. These people have shown remarkable resilience in managing to keep their credit standing high despite market pressures pulling many of us into debt, default and bankruptcy. That’s why it seems wrong that some of the most popular credit cards for excellent credit are inherently misleading products that have the potential to damage the credit scores that consumers have worked so hard to get and maintain.
Unbeknownst to many people with Visa Signature credit cards, World MasterCard credit cards and American Express charge cards, they are actually in possession of No Preset Spending Limit (NPSL) cards. Consumers generally believe that these spending vehicles provide unlimited purchasing power. However, the only limit that is missing is the one credit card companies tell them about. NPSL cards have limits; consumers just have no way of knowing what they are because issuers do not release them. Why? So they can perpetuate the myth of unlimited spending. Credit card companies want you to think that NPSL cards provide limitless purchasing potential because there is no other real reason to use one.
There are two types of NPSL cards currently offered: charge cards and credit/charge hybrid cards. The charge cards allow users to spend an undisclosed amount each month and require that they pay back in full any expenditure by the end of the month. Hybrids can be used like credit cards up to their revolving credit limits, meaning that users must only pay certain minimums each month in order to stay current on their bills. Consumers are allowed to surpass their revolving credit limits (by how much is unknown) but must pay back any expenditure that exceeds them at the end of the month.
Since consumers have no way of knowing their own limits, they are susceptible to having their cards declined, which can be simultaneously embarrassing and difficult to deal with. This is not the only drawback of NPSL cards though.
According to a No Preset Spending Limit Card Study conducted by CardHub.com, even though NPSL cards have actual spending limits, issuers do not report them to credit bureaus. They instead either report proxy limits or refrain from reporting limits entirely so as to leave the myth of unlimited spending undisturbed. The various methods used for reporting NPSL cards affect consumers ‘ credit standing in different ways, ranging from FICO—the largest credit scoring agency in the U.S.—ignoring your card’s available credit to your FICO score falling because of high credit utilization.
Why are a card’s available credit and credit utilization important? Credit utilization is a balance-to-credit limit ratio that FICO determines for each one of a consumer’s credit cards as well as for all of them in combination and factors into that person’s credit score. Having a card with high credit utilization is bad for a credit score, as is having a card’s worth of available credit left out of a collective credit utilization calculation.
Unfortunately, according to the study, there is no uniformity in how issuers report their NPSL cards, and three of the top ten credit card issuers in the U.S.—namely, Chase, HSBC and U.S. Bank—refuse to be open about their specific reporting methods. This means that many consumers might have no idea how their spending affects their credit.
Therefore, use of an NPSL card is ultimately ill-advised. These cards are inherently deceptive and are only unique because users do not know how much they can spend with them. They don’t allow unlimited purchasing, but they do provide the potential for credit score damage. So if you’re looking for a credit card and have excellent credit, browse the rewards credit card genre and leave NPSL cards alone. A parade might not be thrown in your honor for having excellent credit after all, but you could take a free trip with the miles you earn on a travel rewards credit card.
This article was written by Odysseas Papadimitriou, CEO and Founder of CardHub.com, an online marketplace for credit card applications and gift card exchange.