When unlimited really isn’t
Unlimited spending credit cards sound like a welcome port in the storm if you’re strapped for cash, want to centralize vacation expenses or need to float money to run a small business.
But are these deals too good to be true?
To best determine if an unlimited card is for you, you first need to understand what the promise of "unlimited" really means.
Unlimited is another way of saying the card has No Preset Spending Limit (NPSL). And NPSL credit cards are just that, cards that do not have a credit limit.
In most cases the card issuer still will have a range up to which you can spend. So instead of assessing a firm $5,000 limit, they might let you go up to $5,150 or even $5,500. But depending on your credit score, the issuer may not allow you to rack up $6,000, $5,501 – or even $5,001 in charges.
Only you don’t know that because your limit that’s technically not preset may travel up or down based on changes in your credit.
These cards can also wreak havoc with your credit score.
That’s because the lack of a clear cut credit limit makes it hard to determine your credit utilization ratio, the percentage of available credit that you use. So if you’re going to be house hunting or kicking tires on a new car, you might not get a loan, because not all NPSL cards are factored into your credit score.
In fact, according to FICO, NPSL cards are only factored into the utilization ratio if it’s reported as a revolving credit card and a high balance or credit limit is also reported.
So even if you carry a zero balance on a NPSL card, something that would factor favorably into your credit score if the card had a set credit limit, it won’t be factored into your utilization ration and ultimately, your credit score.
There are a few other things to keep in mind:
- NPSL can hurt your ability to have some level of self control from impulse purchases.
- You have no way of knowing if or when you might get declined for a purchase. Your limit is static and changes, so you don’t have a concrete number as a guideline.
If you’ve got your heart set on an NPSL card, consider carrying just one that reports high balance to the credit bureaus like American Express cards or the Bank of America Visa.
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