NPSL Credit Cards and the Case of the Unknown Credit Limit.
Posted: February 10th, 2011 | Author: Joe | Filed under: Credit | Tags: Credit, Credit Cards, Guest Post, NPSL Cards, Tips | No Comments »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.
