When you come across a card application that reads somewhere on the marketing material “No pre-set spending limit”, you wonder if “No pre-set spending limit” is too good to be true. As an example, most Visa Signature cards advertise this feature. Other cards that may or may not market this feature include MasterCard World or World Elite cards or American Express Charge Cards (like Green, Gold and Platinum). In reality, these cards are anything but “No limit” cards.
A typically worded advertisement looks like:
No Preset Spending Limit.
There’s no need to worry about hitting your spending limit, as long as you pay in full each month the amount that exceeds your revolving credit limit.
If you read the fine prints for this benefit, it read as follows:
No pre-set spending limit.
Your account does not have a pre-set spending limit, but this does not mean unlimited spending. Each charge that causes your new balance to exceed your revolving credit line will be evaluated based on account usage and performance, other account relationships with us, if applicable, and your experience with other creditors. You must pay in full each month on any amount that exceeds your revolving credit line.
These cards always come with an apporved credit line. What is worse is, there is a hidden pitfall when you hold such “No pre-set spending limit” cards. As these cards technically do not have any credit limit, the card issuers do not report your approved credit lines on these accounts to the credit reporting agencies like Equifax, Experian and Transunion. For this, the reporting agencies will assume your highest balance ever in the history of your account as the credit limit.
What this means is, say your highest account balance at the end of any particular statement was $500. However, you know that your account has a credit line of say, $10,000. And $500 is the highest balance that you have carried on this card account, ever. Thus, your credit report will show $500 as the credit limit for this account and thus your total available credit among all the card accounts will be lower than actual. Further, anytime you carry a balance close $500 (which should be happening more often hypothetically), your report will evaluated as “high credit utilization” which is a negative, and correspondingly, your credit score will drop.
One way to counter this problem is to carry a very high balance, close to the actual credit line, in one of the statements. Following this, the credit reports will show that high balance as the credit limit and thus will achieve an almost real total credit limit on your credit report plus avoid the risk of “high credit utilization”. There are ofcourse reasons not to do something like this as the credit scores will drop significantly immediately after the “high balance” statement, until one of the subsequent statements closes with near zero balance.
Disclaimer: We accept no liability for the content of this post, or for the consequences of any actions taken on the basis of the information provided here. The opinions and thoughts expressed here are purely for the bloggers’ personal notes and not intended for any readers of the posts. Remember, your credit is the single most important tool you have, learn to use it wisely.