As many credit score enthusiasts would warn, a credit card with no preset spending limit does not bode well in the goal towards exemplary creditworthiness.
More and more credit cards, especially those with outstanding rewards and cash back, are entering a crowded market and they’re touting the “no preset spending limit” feature to lure unsuspecting consumers.
Before jumping at the thought of limitless swiping at your local mall, know that these cards are not necessary as lucrative as they seem to be.
Having held a Citi Dividend Platinum Select card for 3 years, also my first credit card, I was almost ecstatic to hear that it was being upgraded to a World MasterCard®, with no preset spending limit. But, a little digging made me hesitant to celebrate Citi’s recognition of me as a good customer.
Unfavorable Reporting of Credit Limits
Cards such as Visa Signatures, World MasterCard®s, and American Express charge cards are often advertised as having no preset spending limit. But, credit scores utilize total credit card limits in their formulas.
So, how are these cards accounted for when calculating the debt utilization ratio (card balances divided by total card limits)?
Card issuers have been known to report the highest balance on that statement cycle as the credit limit.
For example, you spend $5,000 during the month and paid back $3,000 before the end of the statement cycle. On your credit report, you would see a $2,000 balance on a card with a $5,000 credit line. If you didn’t pay back anything, your $5,000 balance is also your reported credit limit – resulting in a repulsive 100% debt utilization ratio.
Therefore, the sole purchase of $10 for the month can take a toll on your credit score.
False Impression of Unlimited Spending
It is easy to confuse “no preset spending limit” as “unlimited spending” – masterful wording to trick consumers.
Having no preset spending limit was considered an attractive perk because it was often found with luxury cards such as the American Express Centurion card (a.k.a. Black card).
While cardholders may not have a clue as to how much they could realistically charge on a card with no preset spending limit, card issuers are not going to place blind faith in a customer’s ability to repay the hefty charges on such a card.
After a brief call with a Citi representative, I learned that card issuers do place a “soft” limit on the card account.
It would not be surprising for me to go over this limit without incurring any penalties. However, card issuers reserve the right to decline any purchase of any amount and any time without prior notice.
Not to mention that the idea of unlimited spending may lead to unnecessary debt accumulation.
When It Is Okay
For twenty-somethings like myself, establishing a solid credit history could mean lower interest rates on major loans later in life. That’s why I make it a goal to avoid credit cards that will not post my spending limits onto my credit reports.
Consumers who have little need to maintain a stellar credit history may opt for the exclusive perks that come along with these higher-tiered cards with no preset spending limit.
For example, Visa Signature cardholders get 24/7 concierge service, complimentary benefits on travel, access to events and experiences, and discounted shopping.
If you are being upgraded to and apply for a no preset spending limit card, consider the adverse effects on credit scores and spending behavior.
Follow Simon in the MyBankTracker Community and on Twitter: @simonzhen.