If you’re in the market for a new credit card, you may not want to get one with a pre-set spending limit. According to a new study from CardHub, no-preset spending limit (NPSL) cards can’t be managed in the same way as traditional credit cards and can negatively impact your credit score.
Additionally, these cards may not offer what consumers think they are – that is, an unlimited line of credit.
“Issuers make it clear that ‘No Preset Spending Limit’ does not mean unlimited spending in their offers,” the study says. American Express (Stock Quote: AXP), for example, states directly in its application that a no-preset spending limit simply refers to the fact that the card’s purchasing power adjusts over time based on card use, payment history, credit record, financial resources and other factors. As a result, NPSL cardholders run the risk of having their card declined when making large purchases.
However, the bigger problem, the study says, is a consumer’s inability to understand how these types of cards impact their credit scores. Credit spending limits are used to determine a consumers’ credit utilization ratio, which, according to FICO, is the percentage of available credit that a person has versus what they elect to use. The credit utilization ratio accounts for almost 30% of a consumer’s total credit score.
So, generally speaking, consumers with NPSL cards run the risk of appearing as if they are spending beyond their means, since in the absence of a specified credit limit, FICO uses the highest balance on record to determine a person’s credit utilization score. In certain instances, it can appear as if a consumer is using all of his or her available credit every month, regardless of his or her spending habits.
CardHub discovered, however, that NPSL charge cards classified by their issuers as an “open” line of credit (rather than “revolving” credit) are not used by FICO to tabulate a consumer’s credit utilization score. As such, they advise consumers interested in this type of credit to take out cards with Chase or Citi, which classify their cards in this fashion.
You can check here for a full breakdown of CardHub’s findings.
—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.