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The Dangers of No-Preset-Limit Cards

What do the Visa (V) Signature, American Express (AXP) charge cards and the World MasterCard (MA) have in common? They are all No Preset Spending Limit credit cards. Many people believe grant unlimited spending capabilities, but this is most assuredly not the case.

In fact, NPSL cards are actually very deceptive credit options that differ from typical credit cards only in the false sense of spending power they provide and their inherent potential to damage consumers' credit scores.

Credit Cards

There are two general types of NPSL cards -- charge cards and credit/charge hybrid cards. Charge cards provide consumers spending power up to a certain, undisclosed limit and any balance incurred must be paid in full by the end of the month. The credit/charge hybrids -- including the Visa and MasterCard options -- confer upon consumers a revolving credit limit they are encouraged to surpass, provided they pay back this excess at month's end. How much one can go beyond the revolving limit is yet another mystery of the NPSL card genre.

As a result of consumers having no way of knowing what their cards' true limits are, NPSL cards are intrinsically prone to unexpected decline, which can be both embarrassing and inconvenient. This does not nearly represent the extent of NPSL credit cards' potential for damage, though.

Oddly enough, even though NPSL credit cards do have limits on their spending and issuers make this fact clear in the fine print, these limits are not reported to credit bureaus or, for that matter, communicated to anyone else. According to a No Preset Spending Limit study conducted by CardHub.com, issuers instead often report proxy limits -- either the revolving credit limit or the highest account balance over a certain period -- to perpetrate the myth that their cards provide unlimited spending. To this end, they sometimes even simply refrain from reporting limits at all.

The way credit card companies report their NPSL cards' credit limits matters because of something called credit utilization. FICO -- the largest credit scoring agency in the U.S. -- uses this balance-to-available-credit ratio as part of its calculations of consumer credit scores. High utilization therefore can have a significantly negative effect on one's credit score. Such an occurrence is highly likely if either the revolving credit limit or a high account balance serves as the reported limit. If the revolving limit is reported, utilization could be around 100% since -- unlike with regular credit cards -- issuers encourage consumers to spend well above their "revolving credit limits." Alternatively, if a high account balance is used, utilization will also be in the 100% ballpark because spending does not typically fluctuate significantly on a monthly basis for most consumers.

One might think any credit utilization concerns could be addressed by making sure spending does not approach the reported limit or by simply getting a card that does not report any limit. (Credit utilization is merely omitted from the credit scoring process if no limit is available). But therein lies the problem. According to the Card Hub study, no uniformity exists in how NPSL cards are reported, and issuers such as Chase (JPM), HSBC (HBC) and U.S. Bank (USB) refuse to even discuss their methods. Thus, consumers face difficulty in trying to account for and ultimately mitigate the potential credit score danger of NPSL credit cards.

As a result, using NPSL cards is not recommended unless the manner in which it is reported can be absolutely determined and it is feasible to adjust spending to ensure low credit utilization. This can be done either if the revolving credit limit is reported or no credit limit is reported at all. The NPSL offerings from Chase, Citi (C), American Express, USAA, Wells Fargo (WFC) and Bank of America (BAC) (only the MasterCard) meet such requirements. If you cannot ensure low utilization, NPSL cards simply do not offer anything relative to regular credit cards that warrants the harm they could do to one's credit score.

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