NPSL Credit Cards and the Case of the Unknown Credit Limit.

NPSL Credit Cards, or No Preset Spending Limit cards, sound great. Who doesn’t like the sound of no limits? It turns out that this great sounding deal may be bad for your credit score.

Lenders, creditors and credit scoring institutions like FICO—the company that creates the most-widely used credit score in the United States—consider a broad variety of information when evaluating consumers. In order to be regarded as a responsible credit card or charge card user you must, for example, pay your bill on time each month, refrain racking up debt and avoid going over your credit limit. This goes for NPSL credit cards too.

These are the main tenets to proper spending and most people are aware of their importance. However, many consumers don’t realize the importance of factors like credit utilization, and their credit scores suffer because of it.

Credit utilization

Credit utilization is a balance-to-available credit ratio that organizations like FICO include prominently in their credit scores. It basically measures how much of your available credit you are using—the lower the better—which is important because responsible credit users, the thinking goes, use only the credit they need, not all that is given to them, and leave themselves a significant buffer in case of emergency.

High credit utilization is typically simple to avoid, especially for people with excellent credit. Just make sure that your spending is about 30%-40% of your credit limit each month. But what if your credit card company does not inform you of your credit limit and/or you think your card has unlimited spending? How can you keep your utilization low then?

NPSL Credit Cards.

Credit card companies often don’t provide their customers with concrete spending limits because of a feature known as No Preset Spending Limit (NPSL). Credit cards with this feature—like the charge cards from Chase and American Express, World MasterCard credit cards, and Visa Signature credit cards—have limits that change on a month-to-month basis reflecting various factors such as spending patterns, payment history, and economic trends.

Both this secrecy and the fact that the feature’s name contains the words “no” and “limit” lead many consumers to buy into the myth of the limitless credit card. Still, whether you initially misunderstood the meaning of NPSL or not, you never know what your spending limit is with an NPSL credit card, which makes it difficult to effectively budget and increases the chances that your card will get declined when you try to make a big ticket purchase.

As you might expect, the lack of uniform spending limits for NPSL cards also affects how credit utilization is calculated. According to an NPSL Credit Card Study conducted by CardHub.com in Nov. 2010, credit card companies report proxy limits to the major credit bureaus in place of their cards’ true spending caps or they just report nothing at all. As a result, FICO could consider you to have used more of your available credit than is truly the case or to simply have less available credit overall. Either way, credit damage is possible. The study also discovered that credit card companies use various types of faux limits and that some of the largest issuers—namely HSBC, Chase, and U.S. Bank—refuse to publicly reveal which they report. Thus, an NPSL card’s effect on your credit standing might be both unpredictable and impossible to compensate for.

Recognizing the importance of credit utilization is ultimately very important to garnering the best credit score possible. You must therefore find out what your credit limit is and make sure to keep your spending well below this amount. If your issuer cannot provide you with a definitive limit because your card has NPSL, then you should close your account and get a card without this feature. NPSL is not a reward, it’s a burden, bringing uncertainty and the possibility of credit score damage. Given the fact that NPSL cards are for people with excellent credit, a traditional rewards credit card would be an excellent replacement.

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Balance Transfers – Simple Solution or Debt Enhancer?

A balance transfer credit card is a tool that can be used either effectively or haphazardly as a debt relief solution. A consumer has an opportunity to relieve some of the burden of debt but in many cases, the balance transfer card is too much of a temptation that results in even more debt. Should balance transfer cards be considered a solution to consumer credit card debt?

Here’s a look at how things work:

Understanding Balance Transfer Credit Cards

Credit card companies issue balance transfer cards to a target market of consumers who actively use credit cards. The balance transfer cards typically offer a low (or no) interest rate for a promotional period of time – usually 6-12 months. A consumer can use the balance transfer cards to move existing credit card balances to one card and consolidate the amount of credit card payments they make each month. Provided a card holder can pay off the entire balance placed on the new card at the lowered interest rate within the promotional time period, a balance transfer credit card can be a valuable tool for debt elimination.

Understanding the Risk of Balance Transfers

While the resource can be ideal for some consumers, there are also risks associated using this tactic. Traditionally, using other credit cards to pay off credit card debt has been known to start a vicious cycle of bad debts. However, if there is a sufficient plan in place for effectively paying off the total balance before the low interest rate ends, the benefits are greater than the risk.

It is the temptation that may make balance transfer cards a non-viable resource for eliminating debt. Cardholders that consolidate their balances to one card only have one payment to make each month. They may become inclined to either use their now balance-free card to make more purchases or allocate the ‘extra’ money they have after consolidating payments for other things besides debt elimination. The vicious cycle of spending more than you have is often a big factor for consumer continually in debt. Adding a new credit card to the mix may be a dangerous financial move.

How to Make It Work

If you still have good credit and can get approval for a balance transfer credit card, you must first make some considerations about your finances and spending habits before signing up.

Have a Plan

Say you consolidate $3000 worth of balances from several other credit cards. Your low interest rate period of the balance transfer card is 12 months. You have to calculate the outstanding balance divided by 12 months to figure out how much you need to pay each month to be debt free within the year. In this case, you would need to pay at least $250 a month, every month for a year to zero out the balance. You also have to factor in the interest charges on the card each month so add a few more dollars to your monthly payment to account for that. Even if your minimum payment each month is only $75, you need to commit to allocating a full $250-$275 a month to eliminate the debt in time. Resist the temptation to only pay the minimum and spend the rest elsewhere.

Compare Offers

If your credit is good and you have the option of several cards, make sure you check the terms and conditions of each of the balance transfers to find the right one for you. You may be tempted to sign up for the first offer you get, but it is in your best interest to find the card that best suits your lifestyle.

You may be approved for a balance transfer credit card but be cautious of your limitations. You may have $5000 in existing credit card balances but only a $2500 limit. Work out the numbers to see if it is worth making transfers if you can only deal with a portion of your total balance owed.

Stop Spending

Once you have zeroed out your other credit card balances, stop spending beyond your means. A clean slate may be too strong a temptation so consider taking the cards out of your wallet and only use one for emergency purposes – at least until the balance transfer card is also zeroed out.

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Goodbye Bank of America!

I’m ditching my BofA credit card!

Some astute readers will know that I typically only have good things to say about my Bank of America Upromise card.

Not anymore.

My wife and I have had this Upromise rewards card for about 6 years and make a habit of paying the credit card balance in full every month. The reward is a monthly contribution to our 529 college plan for our children. Basically, 1% of our monthly expenses get contributed to the fund. It’s not going to make or break the college fund, but every little bit helps.

As it is so easy to do with many habits, we let this one slip.

Over the Thanksgiving holiday we carried a balance for one month -one month, no late payments. We paid the balance in full for December.

Imagine my surprise when I received our credit card statement for the month of December – the month after we paid the balance in full, mind you – and saw a finance charge for $45!

I naturally assumed this was a billing mistake caused by the due date of the previous statement being on a holiday (New year’s day) and that one call to customer support would set things right.

Wrong.

It turns out I’m a victim of “Residual Interest”, which is a clever way for credit card companies to stick you with 2 interest payments when you carry a balance for a month even when pay your card balance “in full.”

I asked the very pleasant BofA support rep if this was a new change as I had never heard of or had to pay residual interest in the past. She assured me it’s common practice and part of my card agreement. ( I looked and could not find it.)

Fair enough.

I mean, it’s clearly legal for them to do, despite all the wonders of the Credit CARD Act of 2009, this is apparently one of the egregious acts not eliminated by the CARD Act. But It’s also perfectly legal for me to take my business elsewhere – and that’s what I’m doing.

So, goodbye Bank of America! I’ll be taking my purchasing habits to a new rewards card.

I wish it didn’t have to end like this, but it’s your choice not mine and at the risk of sounding arrogant – you chose poorly.

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Is Tracking Cash Flow Really Easier When You Buy With Cash?

“Tracking spending is easy when you pay for everything in cash. But checks, credit, debit, and electronic payments all make the trail harder to follow. Toss in payments made quarterly or annually and you have a murky soup of spending.”

I came across this in a Yahoo! Finance article last week and thought it must be a typo, and yet there it is in an article by a well known finance writer.

I know there is a rather large anti-credit card movement happening these days. There are countless blogs and posts devoted to cutting up your credit cards and living an all-cash life. Dave Ramsey is a big proponent of just such a move. I know it works for many people, and for others it’s the only way they stay out of debt. But to say it’s easier to track your expenses with cash is plain silly.

It’s certainly easier to live within your means when you pay with cash, but it’s also easier for small expenses to slip through the cracks. And and envelope system quickly gets overwhelming when you try to set one aside for every category of expense. It’s must easier, more detailed and less time consuming using a credit card or debit card statement for tracking expenses -especially when you use finance software that automatically updates your transactions based on those statements from a website!

What gives?

For what it’s worth, the rest of the article has some solid tips like the importance of settings goals, and fostering good habits. Automation is also discussed, and as any long time reader of this blog knows I’m a big fan of automating your finances, and so is David Bach.

Related Posts:

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