The Truth about No Preset-Limit Credit Cards

If you aren’t a financial expert, as most of us aren’t, you may be confused when it comes to all the different credit cards that are available. Different credit card companies will offer you different deals, each promising something that seems too good to be true. And when it seems too good to be true, it often is. If you’ve been offered a credit card with no preset limit, remember that there is plenty of fine print that you need to read before committing. Here are a few things to consider before jumping on the no preset-limit credit card bandwagon.

The Truth about Credit Cards with No Preset Spending Limit

1. Credit utilization affects your credit score.

Credit utilization is a fancy term that credit bureaus and financial services use to describe how much credit you have used out of the amount of credit that is available to you. Credit scoring companies determine your credit utilization by percentage for each account. For example, if you have a credit card with a limit of $5,000, and your balance is $500, then you have a credit utilization of 10%. The lower your credit utilization rate, the better your credit score.

2. NPSL credit cards can effectively ruin your credit score.

The biggest problem with no preset-limit (NPSL) credit cards is that credit bureaus and scoring companies often make the mistake of completely misreading your credit utilization rate. Because many NPSL credit cards have no revealed set limit, many creditors will report your credit utilization rate as 100%, whether or not you are using 100% of your credit. As such, NPSL credit cards can be risky, especially if your credit score is already average or low.

3. There is no such thing as a true no-limit credit card.

Even if you did want to take the risk of harming your credit score with a NPSL credit card, you should also know that “no limit” is a misnomer. Every card does have a limit; it just isn’t one that is revealed. For example, one type of NPSL credit card is a purely charge card, meaning that there is a limit, it is just undisclosed. Any remaining balance must be paid by the end of the month. Another NPSL card is a credit/charge hybrid card, in which the limit is revolving, and credit companies actively encourage their customers to pass the limit, as long as they can pay the balance at the end of the month, too. As they say, there is no such thing as a free lunch.

Of course, there may be certain circumstances under which you would be interested in getting an NPSL credit card. At the same time, however, the most important thing to do is to look at all your options, including other credit cards or not getting a new credit card at all, before making any final decision.