credit cards

Do no-limit cards affect score?

Leslie McFaddenQuestionDear Credit Card Adviser,
I had a question about NPSL, or "no preset spending limit," cards. Citi doesn't report a balance on NPSL cards, so effectively this would put the "credit limit" at zero dollars that's reported to the bureaus. Would this mean that carrying a small balance, say even $50, will put my credit utilization at 100 percent with the credit bureaus? And, would carrying a zero-dollar balance before my statement hits each month put my utilization at zero percent? If so, would this help or hurt my score, and is it a good idea?
-- Dan

AnswerDear Dan,
NPSL credit cards aren't your typical credit cards. "No preset spending limit" doesn't mean unlimited spending potential, as the fine print for these cards will tell you. In some cases, issuers of NPSL cards may simply not disclose the spending limit to the cardholder and approve transactions at their discretion. In other cases, they'll disclose a revolving credit line and approve transactions that exceed it at their discretion, without imposing an overlimit penalty. NPSL cards also differ in their repayment terms. For example, the charge cards from American Express require monthly charges to be paid in full, while others operate as charge card/credit card hybrids, only requiring payment in full for the amount charged over the revolving credit line.

The terms and conditions for one such card from Citi makes it clear which type of NPSL card it is: "Each charge that causes your new balance to exceed your revolving credit line will be evaluated based on account usage and performance, other account relationships with us, if applicable, and your experience with other creditors."

It gets even more complicated when you look at how NPSL cards can affect credit scores.

Part of your credit score comes from credit utilization, which is the proportion of balances to credit limits on revolving accounts. Credit utilization counts toward a factor worth 30 percent of your FICO score, a score commonly used by lenders. The lower your utilization, the higher your score can be.

Unfortunately, as a recent CardHub.com study points out, card issuers of NPSL cards differ greatly in how they report the limit information of NPSL cards to the credit reporting agencies. For instance, some report a credit limit, some report a high balance or high credit (the highest amount charged over a period of time) in place of a credit limit, and some report the account as an "open" line of credit instead of a revolving account.

How an NPSL card is reported determines the effect on your overall credit utilization, which in turn will impact your FICO score. As far as the other factors that go into your score, such as payment history and length of credit history, an NPSL card is treated the same as a traditional credit card with a designated credit limit.

If you have an NPSL credit card, examine your credit report to see how the issuer has reported the account. You can order a free copy of your credit report under federal law at AnnualCreditReport.com.

"A limit, a high balance and the type of account it is, whether it's revolving or open -- those are the three things you should look for," says Barry Paperno, the consumer operations manager at FICO.

First, confirm whether the account is listed as revolving or open. According to Paperno, the newest versions of the FICO scoring model, including FICO 8, do not consider open accounts for utilization, which means that spending on those accounts won't affect this portion of your score.

If the account is reported as revolving, look to see if there's a limit or high balance reported. If there's a limit listed, then that limit will be factored into your credit utilization. If instead of a limit there's a high balance, the high balance will be used as your credit limit for figuring utilization.

"If neither are reported, and the account is reported as revolving, then that account is excluded from utilization calculations by the FICO score," says Paperno.

Now for some strategies: If your NPSL card is being taken into account for utilization, then as with any credit card, you'll want to stay well below your credit limit or high balance. If your high balance is low, you can cope by making a large purchase to increase it, paying off the balance, and then keeping purchases well below the new high balance. If your NPSL card isn't factoring into your utilization, then that might be the card you want to use for large purchases.

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To ask a question of the Credit Card Adviser, go to the "Ask the Experts" page, and select "Credit Cards." Read more columns by the Credit Card Adviser. Follow Leslie McFadden on Twitter.
 

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