NPSL cards: The credit myth that puts you at risk
Everyone knows about the misleading and predatory credit card practices that characterized the pre-Great Recession personal finance landscape. We know how malicious credit card companies preyed upon vulnerable demographics, making money for themselves and dragging down Americans’ credit in the process. However, many people believe that these practices are largely a thing of the past, that the Great Recession is over and that the new credit card laws (CARD Act) have helped protect consumers. While these things are indeed true to a certain extent, unscrupulous credit card practices still persist, and not all target those with bad or little credit history. In fact, some of the most popular credit cards and charge cards for people with excellent credit are inherently deceptive products that have the potential to damage the credit standing of those who use them.
NPSL cards – the background
If you have a Visa Signature credit card, a World MasterCard credit card or an American Express charge card, you are in possession of what is known as a No Preset Spending Limit (NPSL) card. People with excellent credit gravitate to NPSL cards as a result of the common misconception that they provide unlimited spending capabilities.
In reality, however, NPSL cards do have limits; they just are not disclosed to consumers. Credit card companies refrain from providing users such crucial information in order to prolong the lucrative myth of endless spending. While this practice lines issuers’ pockets, it also creates problems for NPSL card users. Because consumers have no idea how much they can spend with NPSL cards, they are extremely vulnerable to their cards being unexpectedly declined, an occurrence that can be both logistically difficult to manage and downright embarrassing.
NPSL Credit Risks
NPSL cards also have the potential to drag down users’ credit scores. Although NPSL cards do have spending limits, issuers do not report them to the credit bureaus. Instead, according to a No Preset Spending Limit Card Study conducted by CardHub.com, they either report proxy limits for their NPSL cards or no limits at all. This is important because the largest credit scoring agency in the U.S., FICO, uses information about consumers’ credit limits to determine the balance-to-available-credit ratio, known as credit utilization, that factors prominently into their credit scoring calculations. Exhausting much or all of one’s available credit leads to high credit utilization and a lowered credit score.
However, according to the Card Hub study, no uniformity exists in what faux limits credit card companies report for their NPSL cards, and three of the top 10 issuers — Chase, HSBC and U.S. Bank — refuse to be upfront about how they report. Consequently, NPSL card users have difficulty keeping credit utilization low and FICO scores high.
Avoid NPSL Card Use
As a result, use of an NPSL card is simply not worth the risk. All they truly provide is a great deal of uncertainty and the potential to affect consumers’ credit standing in unpredictable ways, ranging from FICO not rewarding you for your NPSL card’s available credit to your FICO score falling because of high utilization. What they don’t provide is unlimited spending power. Therefore, people with excellent credit should refrain from using NPSL cards and open credit cards that reward rather than punish them for having such high credit standing.
This guest post comes from Odysseas Papadimitriou, CEO and Founder of CardHub.com, a website that helps consumers compare credit cards and gift cards.