There is nothing new in that lots of credit card applications for good credit customers come with no pre-set limits. Almost everyone agrees that it is cool to be unrestricted in card spending and admits being happy about having a no pre-set limit plastic in his/her wallet.
One of our readers, Mr. Collins, wrote us about his experience of owning such a card and his story is sure to set credit consumers with no pre-set limit ideas on the right path.
If you have got a notice from your bank offering an upgrade from your current card to a no limit plastic, think twice before you respond to give permission.
Likely, the no pre-set limit benefit is designed to give even more of credit card convenience, one of the major factors that attract card users. Mr. Collins' story proves once again that such convenience may t cost you not only money but also your credit reputation.
Mr. Collins, a small business owner, agreed onto the upgrade to his credit card (we do not mention the issuer out of his request) and enjoyed his extended (a no pre-set limit does not mean unlimited) spending capacity for quite a while. Until he noticed a considerable drop in his credit scores.
What happened? Could it really have been possible considering the man's faultless credit card bill payments and reasonable spending?
Upon inquiry at the credit bureaus, Mr. Collins revealed that his bank did not report his monthly balances, and this, as it appears, has a ruining effect on one's credit scores.
The whole thing is about the credit card debt ratio, or credit utilization, which indicates your actual debt (balance) as apposed to the credit limit. Say, if you have a credit card with $10,000 limit and you charge $5,000 on it, your credit utilization will be 50%.
Ideally, credit card debt ratio should account for 30% of the limit available, so that your credit score stays undamaged.
With no pre-set limit credit cards, things work like this. Most of such cards do not report your balances and so credit bureaus can't calculate the credit utilization ratio, which impacts your score. All the time it appears as if you were using all of your credit available, which in fact is wrong as you are potentially unlimited in your spending.
Mr. Collins has his credit rating hurt because of such credit card practice and insists that a no pre-set limit is more a headache than anything else actually. However, our team advises the following. Do, get yourself a no pre-set limit plastic but not until you make sure it reports your highest monthly balance to the credit scoring agencies.
In this case, the highest balance will be your limit and the credit bureau will be able to calculate the credit utilization ratio on your credit card. Say if you charge $2,000 one month, it will be your limit.
Whether a no pre-set limit is actually a perk is up to you to decide. In all other respects, it is a regular credit card that requires timely and at least, minimum credit card payments and, as surprising it might sound, reasonable spending as it is not unlimited in its sense. It only gives you freedom to set your own limit, nothing more.