You may think you have reached the top echelon of credit card users when you apply for and receive a credit card with no pre-set credit limit. While this may be at least partially true – these credit cards usually are reserved for those consumers with the best credit scores – you may be hurting your credit without even realizing it when you use one of these cards.
“How can this be?” you may ask. Simple. Thirty percent of your overall credit score is determined by your credit utilization percentage. Your credit utilization percentage is the percent of money you own to the amount of credit you have. Therefore, if you have a credit limit of $20,000 and owe a total of $10,000, your credit utilization percentage is fifty percent. The lower your credit utilization percentage, the better your credit rating.
This is where the problem with no-limit credit cards comes in. Since these cards do not have a pre-set limit, there is no way of determining a credit utilization percentage. In fact, it can reflect that you have no credit available, which essentially puts your percentage at 100%. In turn, this can lead to a significant drop in your credit score.
Some credit card companies help customers overcome this problem by reporting the highest debt held on the card as the credit limit. So, if you carried a balance of $20,000 for one billing cycle, that will be reported as your credit limit in order to determine your credit utilization percentage. Of course, this means you have to actually place a large amount of debt on the credit card in the first place, which is something you may not want to do. In addition, the Fair Credit Reporting Act does not require credit card companies to report this balance.
If you choose to use a no-limit credit card, you may want to ask the credit card company to report your high balance to the three major credit reporting agencies. Once again, however, there is no guarantee this will be consistently reported and documented on your credit report. Until awareness is raised about this issue and a better solution is found, the only other option is to avoid these credit cards altogether unless you don’t mind the blemish on your credit rating.