THE BLOG

What Your Credit Card Company Doesn't Want You to Know

12/20/2010 04:10 pm ET | Updated May 25, 2011

If you have excellent credit, there's a good chance that you have a Visa Signature credit card, a World MasterCard credit card or an American Express charge card. If this is, indeed, the case, you might be in for one nasty surprise. Unbeknownst to many cardholders, these cards are actually classified as No Preset Spending Limit (NPSL) credit cards. While this designation might not mean anything to you in name alone, it most certainly should not be ignored. Why? Because many NPSL cards have the inherent potential to drag down your credit score, even when you use them responsibly.

In order to grasp how this could conceivably occur, you must first understand how NPSL credit cards are structured. There are two types of NPSL cards currently being offered: charge cards--like those from American Express--and hybrid cards--like the Visa and MasterCard options--that combine certain features from both credit cards and charge cards. NPSL charge cards allow consumers to spend up to a certain amount, which much be paid back in full by the end of each month. The hybrid cards, on the other hand, provide each user with a revolving credit limit that they are actually encouraged to surpass as long as they pay back the excess amount each month.

Oddly, however, NPSL card issuers refuse to disclose the actual maximum amounts consumers are able to spend with either type of card. They refrain from releasing such basic, useful information in order to protect the commonly-held myth that NPSL cards allow unlimited spending. One troublesome implication of this omission is that NPSL cards are prone to being declined unexpectedly because users have no way of knowing if they are close to exhausting their credit. Anyone who has ever had a credit card declined knows how embarrassing and logistically problematic this can be.

Another ramification of NPSL card issuer secrecy is related to something called credit utilization. Credit utilization is a balance-to-available credit ratio that FICO--the nation's leading credit scoring agency--determines for each of your credit cards individually as well as for all of them in combination before factoring this information into the calculation of your credit score.

But if NPSL card issuers don't make their cards' limits known, how does FICO gauge your available credit when you have one?

According to CardHub.com's No Preset Spending Limit Credit Card Study, NPSL card issuers either report proxy limits for their cards to the major credit bureaus--from whom FICO gets its information--or they simply refrain from reporting limits for their cards at all. Each of these methods affects credit utilization differently, and no uniformity exists in the way NPSL card issuers report their products. As a result, the effect of an NPSL card on your credit score can vary widely, from the benign--your card gets ignored by FICO-- to the significant--you max out your card every month and your credit score takes a hit.

To make matters worse, three of the ten largest credit card issuers in the United States--namely HSBC, U.S. Bank and Chase--refuse to be open about their reporting tactics despite the importance of this information to their own customers' credit scores. Such a lack of transparency is starkly apparent in their refusal to participate in the Card Hub study despite multiple requests.

Ultimately, you want to be able to make an informed decision about your credit usage, and the standard operating procedures of NPSL card issuers preclude you from doing so. What do you really get in return for all of this deception? A false sense of spending power, the potential for your card to be declined when making a large purchase and a possibly-falling credit score. Does this sound worth it to you?