On the face of it, it’s the sweetest deal in credit card wonderland: a credit card with no pre-set spending limit. No-limit cards are typically offered by issuers like American Express, which cater to the high end of the credit card market – people with an excellent credit score and high disposable income.
However, in a strange twist, no-limit credit cards may actually hurt the cardholder’s credit score.
What gives? A no-limit credit card may negatively affect a part of your credit score known as your credit utilization score, or debt-to-credit ratio. A full 30% of a person’s credit score is determined by the ratio between the credit available on an account and the outstanding balances. The lower the balance in relation to available credit, the better; your credit utilization ideally should stay as low as 30% or less.
The problem with no-limit credit cards is that there is no credit limit to report to credit reporting agencies. Card issuers may report an arbitrary limit based on the average monthly charges, or, in some cases, they report the highest-ever balance as the credit limit on the account. In either case, you can easily lose out.
If the card issuer reports an arbitrary limit based on your average monthly charges, it will lead to a high credit utilization score. Say that you charge, on average, $8,000 each month. If that average is reported as the credit limit on the account, your credit utilization will be a whopping 100%. Even if one month you charged $10,000 and your card issuer reports that as the credit limit, your credit utilization ratio will still be an astronomical 80%.
The only way to avoid this conundrum is to deliberately charge a lot one month. However, if your average monthly charges are $8,000, you’d have to charge $24,000 one month to reach the ideal credit utilization ratio of 30%. That’s a lot of hassle just for the privilege of having a no-limit credit card! Worse, there is no guarantee that your card issuer will continue to report that high balance as your credit limit every month, and you could find yourself back at square one.
So what can you do? Pull your credit report to find out what credit limit your card issuer reports for the card. If it’s low, call your card issuer to complain. Unfortunately, even if they agree to report your highest monthly balance once, credit limits are reported monthly, and there is no guarantee that they will continue to do so month to month. You would have to pull your credit reports from all three credit reporting agencies over a period of time to continue to verify what’s reported for your no-limit credit card.
Is it worth the hassle? Keep in mind that a no-limit card doesn’t mean unlimited spending. It simply gives the cardholder variable purchasing power, which fluctuates with the cardholder’s use of the card and other factors, such as credit score. On the other hand, many of these cards do offer great perks and benefits. So if you’re not worried about your credit score, yes, no-limit cards do offer extra flexibility and can, indeed, be a sweet deal.
If it doesn’t, one recourse would be to close the account. Another would be to ask your creditor to report your balance. However, according to Terry Clemans, executive director of the National Credit Reporting Association, there is no guarantee that your credit limit or highest balance will be reported month to month.
The best way to protect yourself is to check your credit reports at all three credit bureaus to find out what information is listed.
