No-Limit Cards
These Cards Can Trash Your Credit
By Daniel Muniz
A segment of credit card consumers yearn for certain prestigious
no-limit or no-preset-limit cards. Big banks and national credit
card issuers often lavish customers of these kinds of cards with
plenty of extra perks like generous air miles and other rewards. As
a result, an ever-increasing number of high-end consumers covet such
credit cards.
But this type of credit has a nasty side effect. It can
ultimately ruin your credit throughout the course of time.
Even the Fair Isaac Corporation, creator of the FICO credit
score, warns people to seriously consider the long-term impact that
such cards can have on their scores.
The reason for the problem is credit utilization.
Credit utilization is a one of the credit factors that make up a
FICO credit score. It accounts for 30 percent of a score and is
determined by the ratio of the present debt of an account to its
credit limit. For instance, suppose a consumer has a credit card
with a credit limit of $10,000. From that account, suppose it has a
current total balance of $2,000; thus the credit utilization is 20
percent.
The reason that credit utilization is important enough to
represent 30 percent of your credit score is because it vividly
demonstrates your total usage of debt in regards to what you are
allowed to borrow. Creditors can ascertain how well you are doing in
paying down your debt.
The lower the utilization the better since it means that you have
less debt outstanding. The percentage closest to zero or zero itself
means that this factor is at its best possible value since it
indicates that the consumer has most, if not all of its full
borrowing potential available. Consumers want to have zero or close
to zero credit utilization although according to a lot of observers,
less than 30 percent is considered to be good while under 10 percent
is better; and naturally close to zero is the best.
Inversely, the greater the utilization the worse since it means
that you have substantially more debt to pay off. Likewise, the
percentage closest to 100 percent or 100 percent itself means that
this factor is at its worst possible value since it indicates that
the consumer has very little if any of its borrowing potential
available. In other words, a consumer does not want to have his or
her card “maxed” out because such a “full” utilization will tank a
credit score.
Unfortunately for the no-limit or the no-preset-limit cards,
there is not a way for the credit scoring company to calculate
credit utilization for that particular account because the creditor
does not issue a credit limit. Consequently, the credit limit
immediately becomes the current balance of that account. The
disturbing result is that every month, that card is shown on your
credit report as a “maxed out” trade line even though that is not
the case.
The credit reports from each of the credit bureaus do not have any
provision to account for this peculiarity, thus the credit scoring
company cannot account for it either since it is not able to
differentiate from a no-limit card to a regular credit card.
In other words, you’re screwed!
The credit scoring company to take the bogus credit limit that
creditor has given and accordingly assigns it the negative value
that maxed out accounts receives, which substantially deducts from
your score.
But most depressingly, there is absolutely nothing you can do
about it other than complain to the creditor.
In addition, there is also nothing that violates the Fair Credit
Reporting Act (FCRA) so there is not anything that the creditor is
doing that is illegal.
As the Fair Isaac Corporation suggests, the best possible course
of action is not to get the card in the first place. And if you
already have such a card, then the next best thing to do is to
cancel it and transfer the balance to another card or consolidate it
to an installment loan.
And to add insult to injury, there are also certain credit card
issuers who do the exact same thing but with regular credit cards.
That is, such cards do have an established credit limit but the
issuer goes ahead and uses the current balance as the credit limit.
As a result, that card looks like it is always “maxed out” even
though it does have a legitimate credit limit as part of the credit
terms.
Again, the best course of action is to run as fast as you can
from that creditor.
There really is no reason to have a card that is just going to
deduct a lot of points from your credit score especially if you are
doing everything right in paying on time and making good size
payments. Your time and effort is best spent on creditors that will
accurately portray your responsible behavior to the credit bureaus.
And besides, needlessly lowering your score will just make any
future debt more expensive to pay off.
Some people have an affinity to such a particular company but you
are your own best credit manager and it is entirely up to you to
ensure that you are maximizing the best possible terms to obtain a
good credit score.
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