Ask Credit Karma: How Do No Pre-set Limit Credit Cards Affect My Credit Score?

Ask Credit Karma: How Do No Pre-set Limit Credit Cards Affect My Credit Score?

The Question:

Recently my husband and I have started trying to clean up our finances. We checked our credit reports and scores and everything looks great except for one thing. My husband has a flexible spending credit card that has a $2500 limit. Any expenses beyond that will be approved on an individual basis and must be paid back down to at least the $2500 by the next month. Recently he made purchases greater than his $2500 limit with the permission of the credit card company. Is this card likely to cause him problems with his credit score?

Thank you, Emily H.

The Answer:

First of all, kudos to both of you for cleaning up your finances and checking your credit reports! Knowing what’s going on with your finances is half the battle; now you just have to maintain those good habits.

Sounds like your husband might have what’s popularly called a No Preset Limit (NPSL) credit card. NPSL credit cards are typically only available to those with excellent credit. Technically, there is a set credit limit, though it’s not revealed to the cardholder because the implication of having unlimited credit is seen as a special perk, along with other rewards offered by the card.

NPSL doesn’t mean the cardholder can charge as much as he wants on the card. The card issuer assesses credit history, spending habits, and annual income and measures transactions against that information. If it seems the cardholder is at risk of overspending or defaulting on a payment, he may face heavy fines or penalties.

NPSL credit cards are useful in some cases, such as for small businesses, high spenders, or for getting great rewards perks.

The Bad News

While NPSL credit cards are great for unlimited spending, they can pose a problem to your husband’s credit score.

NPSL credit cards can negatively impact one of the most important factors of your credit score:  your credit utilization rate. This percentage is calculated by adding your available credit limits and dividing that by the amount of credit you’re using at any given point. A healthy utilization rate is typically under 30%.

The trouble with a NPSL credit card is that it can throw off your credit utilization calculation. These types of cards typically don’t report a credit limit to the credit bureaus since there is no set limit month to month. In other words, the limit is reported as zero. However, your card’s balance is reported. That means your utilization is likely to be inflated higher than it should be, since your credit limit could potentially be lower that your balance.

For example, if your husband’s NPSL credit card is his only card, then his credit report would reflect an open credit limit of “0.” If he charges $2,000 on that card in one month, then his credit utilization would jump to 80% for that month, which would negatively impact his credit score.

On the other hand, some credit card issuers will report the highest balance of your husband’s NPSL card as his credit limit. So if your husband spends $2,500 in one month, that becomes the credit limit used for credit utilization. In this case, your husband’s credit utilization could be salvaged, as long as his spending remains below 30% of the reported credit limit. The difficulty is that you don’t know which factor is being reported to the credit bureaus.

Protecting Your Credit

There are some steps your husband can take to make sure his NPSL credit card doesn’t disrupt his score:

First, your husband should pull his credit reports from all three bureaus, Equifax, Experian, and TransUnion, to find out what has been reported on the NPSL credit card: a credit limit of zero or his highest balance as the card limit. If there’s no limit reported, he may request from the creditor that his high balance be reported, but the creditor may not be able to guarantee that it will always be reported that way each month.

If he wishes to continue using his NPSL credit card, he may want to run up a high balance on his card one month and then pay it all off. That high-balance number will effectively take the place of a credit limit, helping to reduce his credit utilization rate. In fact, his charge of over $2,500 may already accomplish this. Again, this will depend on what the creditor is reporting to the bureau.

Since you both have good credit scores, it might be wise for your husband to get another credit card, one with a set credit limit, so that he can use his NSPL credit card less often and track his credit utilization more accurately. Make sure he does the research to find which card will be best for him and his credit score.

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