Credit cards that hurt your credit score
By Kristin Arnold • Bankrate.com

A no-limit credit card, often considered a valuable perk for cardholders, could, in fact, damage your credit score and make any debt you take on more expensive.

"Consumers who are thinking of opening one of these no-limit credit cards may want to think how deeply their scores will be affected," says Craig Watts, spokesman for Fair Isaac Corp., which developed the well-known FICO score.

The problem is something called "credit utilization," which is the ratio of a cardholder's actual debt to his or her potential debt. In other words, if a consumer has a $10,000 credit limit and a $5,000 balance, the credit utilization is 50 percent. Credit utilization accounts for 30 percent of your credit score. The lower it is, the better it is for your credit score.

However, if the card has no limit, the credit-scoring company can't make the credit-utilization calculation, and that has an impact on credit scores.

Watts says credit card companies that offer no-preset-limit cards will, typically, allow credit-scoring companies to use the highest balance in place of the limit to calculate your credit utilization. So, if the cardholder has a $20,000 balance one month, that becomes the limit used for credit utilization.

What's not reported matters
But card companies don't always report the highest balance.

Anthony Citrano, a partner in a Cambridge, Mass., public relations firm, opened a Citibank World MasterCard account in November of 2004. Within two months, his credit score dropped 50 points at Experian and 35 points at Equifax. Inquiries to the credit bureaus revealed that Citibank wasn't reporting his highest balance.

"It made it look like I was using all of my available credit, which is ironic, because I'm unlimited in how much I can charge on my Citibank credit card," says Citrano.

When he called the Citibank customer service department to get an explanation, he says he was told that they had received numerous complaints about his particular problem but offered no solution. Instead, they instructed him to fax a dispute letter.

Citrano eventually received a letter explaining that "the consumer is protected from appearing to be over the credit limit," since he has no preset spending limit on his credit card and no limit is reported.

"I understand not reporting a credit limit if one does not exist," Citrano says, "but to report zero as a high balance seems dishonest and deliberately destructive."

When Bankrate.com inquired about Citrano's problem, a Citibank media relations specialist issued the following statement:

"Card agreement states that the customer has flexibility to make purchases in excess of his/her credit limit. Therefore, we do not report to the credit bureaus the revolving credit line amount. We do report the current balance to the credit bureaus and maintain that our credit reporting is accurate."