|Credit cards that hurt your credit
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
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
"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."