People with excellent credit know the tricks of the trade, right? I mean, wouldn’t they have to in order to reach excellent credit status? Indeed, such consumers have navigated a minefield of credit trappings, and they’ve weathered the storm of the Great Recession. However, many of them are not aware of one common credit card mistake that is actually borne from having excellent credit. Surprisingly, some of the most popular charge cards and credit cards for excellent credit are inherently deceitful products that have the potential to harm one’s credit score.
Visa Signature credit cards, World MasterCard credit cards and American Express charge cards are classified as No Preset Spending NPSL Limit (NPSL) cards. People with excellent credit are attracted to these cards because it is commonly believed that they provide limitless spending capabilities. However, each NPSL card has a specific limit; it is simply not communicated to the consumer. Issuers refrain from providing customers with such crucial information in order to perpetuate the myth of unrestricted spending power, and while doing so is lucrative, it is also dangerous. Since people have no idea how much they can charge on NPSL cards, they are vulnerable to having their cards get declined unexpectedly, which can be both embarrassing and logistically difficult to handle.
According to a no-preset-spending-limit card study conducted by CardHub.com, credit card companies do not report their NPSL cards’ actual limits to credit bureaus either. Instead, they either report proxy limits or refrain from reporting limits for their NPSL cards altogether. This is problematic because FICO—the largest credit scoring agency in the U.S.—uses information from the credit bureaus to determine a consumer’s credit utilization, the balance-to-available-credit ratio that factors prominently into FICO’s credit scoring calculations. Using most or all of one’s available credit leads to high credit utilization and a lowered FICO score.
However, consumers often have difficulty in preventing this from happening because according to the Card Hub study, there is no uniformity in how issuers report their NPSL cards, and three of the top ten credit card companies in the U.S.—namely HSBC, Chase and U.S. Bank—refuse to be transparent about which methods they use. Therefore, an NPSL card can affect your credit standing in various, unpredictable ways ranging from your card’s available credit being ignored by FICO to your credit utilization rising and your FICO score falling.
Consequently, using an NPSL card is not the best of ideas. After all, what distinctive features does an NPSL card truly confer upon a user relative to any other credit card or charge card? Let’s see: a false sense of limitless spending, an increased likelihood that his or her card gets declined and the potential for credit score damage. Those certainly set NPSL cards apart from other products intended for people with excellent credit, just not in a good way. So avoid the worry, avoid being disillusioned by your credit card company and eschew use of an NPSL card. Perhaps you can open a rewards credit card account instead and truly benefit from having excellent credit.
This article was written by Odysseas Papadimitriou, CEO and Founder of CardHub.com, a website that helps consumers compare credit cards and gift cards.