CardHub.com has recently received many consumer questions regarding No Pre-Set Spending Limit (NPSL) credit cards and charge cards and how they affect credit scores. No Pre-Set Spending Limit cards are just that—credit cards that do not have a specified spending limit.
The lack of a clear credit limit for NPSL cards makes it difficult to determine a consumer’s credit utilization ratio, which is an important variable in calculating consumer credit scores. The credit utilization ratio is the percentage of available credit that a consumer uses. According to FICO, the “Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)” is factored into the “Amounts Owed” portion of a consumer’s score, a portion that counts for almost 30 percent of the total score.
This confusion is compounded by the fact that each credit card issuer reports NPSL credit cards differently to the credit bureaus. In order to understand how the NPSL cards from different issuers affect customers’ credit scores, we contacted representatives from the 10 largest credit card issuers, based on outstanding balances. We also contacted a representative from FICO to understand what information FICO uses to calculate utilization ratios.
Based on the results of these inquires, we found that not all NPSL cards are included in the credit utilization variable of consumers’ credit scores. A FICO spokesperson confirmed that these cards are only included in the utilization ratio if their trade line is categorized as a revolving credit card and either a credit limit or high balance amount is reported. Additionally, if the account is reported as an open line of credit, as opposed to a revolving credit card, it will be excluded from utilization calculations.
The FICO representative explained that in the absence of a reported credit limit, FICO will look to the high balance to use as the ‘limit’ in utilization ratios. A high balance or high credit is the highest balance reported to the credit bureaus, sometimes within a certain time period and sometimes over the life of the account.
For the purposes of this study, we not only collected data about what information each credit card company reports to the credit bureaus regarding NPSL credit cards but also assigned ratings to the companies based on how consumer-friendly their policies are. More specifically, we rated how the information that each issuer reports to the credit bureaus could affect a consumer’s FICO score and the transparency with which they disclosed their NPSL policy.
As it relates to the impact on consumers’ FICO scores, the study concluded that it is best for NPSL credit cards to be excluded from credit utilization ratio calculations. If it is not included there is no way for an NPSL card’s lack of limit to have a negative impact on a consumer’s credit utilization ratio. Therefore, credit card issuers who report their NPSL cards in a way that excludes them from credit utilization ratios received a rating of “Good” in the category for “Potential impact on FICO score.”
On the other hand, credit card companies that report NPSL cards in a way that includes them in credit utilization ratios received a rating of “Fair” in this category. Here’s why: if the credit card issuer reports either a credit limit or a high balance for their NPSL accounts, the consumer is likely to be reported with a higher utilization ratio than they would want. NPSL credit cards are structured in a way that encourages cardholders to spend more than their ‘limit,’ which leads to circumstances in which lenders see the consumer as having a very high utilization ratio on that account, often close to 100 percent.
More specifically, if a credit card issuer reports a credit limit for their NPSL cards, the consumer is able (and even encouraged) to go over the credit limit by a significant amount (as high as 20-30%) and therefore the utilization ratio could be over 100 percent. However, if an issuer accurately classifies an NPSL credit card when reporting to the bureaus, the latest versions of the FICO score will consider anything above 100% utilization as being 100 percent. On the other hand, the benefit of a credit limit being reported is that an educated consumer who is aware of the importance of credit utilization ratios is able to manage their utilization ratio like any other credit card, and never go over the designated credit limit.
If the issuer reports a high balance instead of a credit limit, the upside is that a consumer’s utilization ratio can never be over 100%on that account. The downside is, assuming that the consumer’s spending patterns are similar month to month, he or she will essentially have close to a 100% utilization ratio every month.
As the study relates to transparency, we rated each issuer based on the clarity with which they answered our questions about their NPSL policies. We felt it was important to include a rating for transparency in order to identify the issuers who were committed to relaying accurate information on an important subject matter to their customers. In place of being able to assess direct customer/issuer relationships, we used the information gained through our inquiries as a proxy to judge how transparent each issuer is with both their existing and prospective customers when it comes to disclosing their NPSL policies. We believe that if an issuer makes a conscious decision not to publicly disclose their credit reporting practices, then it is unlikely that their employees at their call centers will be trained to clearly communicate that information to their customers.
Of the top 10 issuers we questioned, Chase, U.S. Bank, and HSBC declined to participate in our study. This is clearly a very complex subject that could have a significant impact on customers’ credit scores, which is why we conducted the study. Chase, U.S. Bank and HSBC’s refusal to participate only adds to the confusion surrounding this issue. The information we requested from the issuers is readily available to their competitors through anonymous credit reports and research panels. However, it should also be easily accessible to both their existing and prospective customers.
Chase initially responded to our questions, but then retracted their answers. This is interesting because it was a Chase customer whose concern with their NPSL credit card that was the catalyst for this study. This customer faxed us a letter they received from Chase. In the absence of an official response from Chase, we went with the information available to us through this letter.
Please find a summary table of the results below.
|Issuer||NPSL cards included in FICO rating?||What do they report for FICO rating?||Potential impact on FICO score||Transparency|
|American Express||No, Open Line of Credit||High Balance||Good||Good|
|Bank of America||Yes||Visa » High Balance MasterCard » Credit Limit||Fair||Good|
|Capital One||Yes||Credit Limit||Fair||Good|
|Chase||No, Open Line of Credit||N/A||Good||Poor|
|Citi||No, Neither Credit Line or High Balance Reported||N/A||Good||Good|
|HSBC||Not Disclosed||Not Disclosed||Unknown||Poor|
|Wells Fargo||Yes||Credit Limit||Fair||Good|
|U.S. Bank||Not Disclosed||Not Disclosed||Unknown||Poor|
|USAA||Yes||Greater of Credit Limit or Current Balance||Fair||Good|
- Bank of America reports the high balance for its Visa NPSL card and both a credit limit and high balance for its MasterCard NPSL card.
- The ratings for Discover are not applicable across the board because Discover does not offer NPSL cards.
- American Express’s NPSL cards are charge cards, not credit cards. The difference between charge cards and credit cards is that charge cards must be paid in full at the end of the month.
- The above study is based on the latest algorithms for FICO scores. Currently, open lines of credit are not used in credit utilization calculations. However, previous FICO score algorithms did include NPSL cards that were reported as open lines of credit.
The information gained through this study proves that not only do NPSL cards create the possibility of a hit to a consumer’s credit score, but they also do not offer unlimited spending power, as their name suggests. In fact, issuers make it clear that No Pre-Set Spending Limit does not mean unlimited spending in their offers. American Express, for example, states the following on the application page for an NPSL card: “No pre-set spending limit does not mean unlimited spending. Purchasing power adjusts with your use of the Card, your payment history, credit record and financial resources known to us, and other factors.”
The ambiguity in how NPSL cards affect your FICO score makes it difficult for consumers to manage their accounts the way they could with a traditional credit card. In addition, the unclear credit limit also means that each time a customer swipes an NPSL card to make a large purchase, they run the risk of not being approved. These uncertainties make NPSL cards much more of a hassle than traditional credit cards.
UPDATE on 11/24/2010 12:42pm: While American Express initially said that charge card and credit card trade lines are reported in the same manner, they just notified us that this is incorrect and that their charge cards are actually reported as open lines of credit and not as revolving lines of credit. As a result, the study has been updated accordingly.
For more information on this study please contact our Media Department.