Lack of Credit Card Limits Can Hurt Credit Scores

Manage Your CreditIn life, not knowing your limits can cost you. Novice cooks should avoid cooking a five-course dinner and start with simpler meals instead. Likewise, those looking to exercise more may benefit from buying a couple of small barbells before signing up for a triathlon.

In these situations, setting limits or restrictions can help you grow and progress to your goal. The same philosophy can hold true for credit cards and their effect on personal finances, which is why you need to be careful about cards that offer no preset limits.

These cards can be a big attraction to consumers, offering the allure of a blank check with added spending security. But consumers should note that even though the lenders advertise no limits, this may only apply to some aspects of the card, leaving other restrictions — and fees — intact.

Depending on your personal discipline, having a credit card with no limits could easily affect your financial behavior. Therefore, knowing a bit about yourself can go a long way toward helping you figure out whether this particular type of card is right for you.

Can no-limit credit cards affect your credit score? That answer varies. Since credit scores operate on a credit-utilization model — a ratio of the amount of credit you're using to your total available credit — many wonder how a card without limits is factored in.

"The effects appear largely unpredictable," writes Jeff Gelles, a financial columnist at The Philadelphia Inquirer. "[The] logic is that there is little real upside to no-preset-spending-limit cards, in part because of the fiction built into the phrase. As cardholders sometimes learn in embarrassing situations, 'no disclosed limit' might be a more honest term."

In a recent study of these credit card offers, examined no-preset-spending-limit cards such as American Express, Visa Signature, and World MasterCard, and found the cards either had no impact at all or were just as likely to raise a credit score as lower it.

Some experts say these cards are just another trick in the credit card companies' arsenal, designed to confuse you in order to get you to overspend, according to former Capital One Financial Corp. executive Odysseas Papadimitriou, who's now the chief executive officer and founder of CardHub. However, the study also found that the overall effect on your credit score can differ, depending on your credit card issuer.

The Visa Signature and World MasterCard in particular carry limits on revolving credit. These restrictions still allow cardholders to postpone payments and incur more interest charges. By comparison, Bank of America substitutes the maximum a cardholder has spent as the credit limit for these cards, meaning that your personal spending habits could weigh more heavily in a credit score.

However, the report found the real discrepancy comes not with bank consumers, but with lenders and credit score companies. For example, Capital One and Wells Fargo report cards' revolving credit limits as actual credit restrictions. To credit bureaus generating FICO scores, this may appear as though you've maxed out your limits, even if you have plenty of spending room left.

Other types of cards may not affect a credit score at all. Certain American Express, Chase, and Citibank cards aren't factored into the latest FICO models. This may benefit those who have trouble staying within spending limits, but if you use these cards and pay off the balances on time, your responsible behavior won't be factored into your credit score.

As is the case with every important transaction you make, you need to read the fine print of a credit card offer to make sure you know what you're getting yourself into. When it comes to financial decisions, ignorance isn't bliss; it's costly.


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