No Limit Credit Cards? There’s No Such Thing!
Here’s why no preset spending limit credit cards aren’t what they seem…
A couple decades ago, American Express was the first credit card company to offer no preset spending limits on their charge cards. Over the past several years, more and more cards have adapted this feature (Visa Signature & World MasterCard). But here are some things about them you need to know…
No preset limit does not mean no credit limit!
Make no mistake about it… these so-called no limit credit cards do have a spending limit! They just don’t have an upfront “preset” limit – that means each purchase is approved or denied on a case-by-case basis. Factors like your credit history, spending patterns, and income go into the equation to determine how much you can spend.
If you try and go above and beyond your typical spending patterns, you may find your purchases being denied. For example, if you typically charge $1.5k per month on your no preset limit credit card and then one month you try to spend $12k, don’t be surprised if your spending is cut-off.
In a nutshell, these are far from being a no limit credit card. There is a definite cutoff point but unlike other cards, you just don’t know when that happens.
With no limit defined, your credit score may be negatively affected
On revolving credit accounts (i.e. credit cards) the FICO scoring algorithm takes into account what percentage of the credit limit is being used. Using a high percentage on even one account is actually a bad thing. Typically you never want to use more than 30% (and under 15% would be even better).
Unfortunately for a credit card with no limit defined, issues can arise when computing the credit utilization ratio of that account. Below is a letter from FIA Card Services (Bank of America) which explains why…
If your highest historical balance was several times higher than your monthly balance, then this shouldn’t be a problem. But if you typically spend $1.5k per month and your highest historical balance was $3k, that would equal out to be 50% credit utilization in the scenario described above.
This is without a doubt the biggest drawback with no preset limit credit cards.
Banks love no preset spending limit
Obviously the perceived notion of a “no limit credit card” is good for marketing, but that’s not the only reason banks love these cards…
A no preset limit credit card is a valuable risk-management tool for the bank. Because the credit limit is not disclosed to the customer, it can be adjusted at anytime with the customer never knowing. This means there’s no need for those nasty letters saying an account’s limit has been reduced, and hence, there is no customer backlash.
This is why you are seeing more and more World MasterCard and Visa Signature cards. In fact, thanks to the financial calamities experienced during the later part of last decade, I predict that the vast majority of cards on the market will have no preset limit by 2020.
Should you get one or not?
There are so many great reward credit cards that have no preset limit, it’s hard to avoid them if you want to get the most bang for your buck. They should pose no problem if you know what you’re doing.
What I have done with my own no preset limit credit cards is make a large purchase on each that is approximately 700% higher than my average monthly spending. I then return those purchases during the next billing cycle. That way my highest historical balance is about 7x higher than what I will probably be spending during any given month (which means a maximum 15% utilization rate on each of those accounts).
Conclusion: Remember, a no limit credit card does in fact, have a spending limit. Manage them the right way and they shouldn’t be a problem.
Personally I think preset spending limits is a very good security feature. Keep in mind that your credit card theft liability is limited as will as your debit card’s liability. Why take that offer?
Think also of the psychological difficulty controlling your spending habits once you have it in head that there is no limit. Hand that card to your girl and see what happens…..