You are undoubtedly familiar with the old adage that “the grass is always greener on the other side of the fence” , but you probably don’t know why this cliche—which speaks to the natural inclination people have to value the unknown over the known—is relevant to credit and charge card use. Interestingly, many of the most popular credit cards for people with excellent credit are so blindly sought after because of their assumed potential (the unknown) and not because of their practical benefits (the known) which can actually hurt consumers’ credit standing.
NPSL:What it is and what it isn’t
The Visa Signature credit card, the World MasterCard credit card and the charge cards from Chase and American Express all have a feature known as No Preset Spending Limit (NPSL), which drives their popularity. Some people gravitate toward these cards because they understand NPSL to mean no spending limit. Others may realize that NPSL cards have spending limits which are determined on a monthly basis but are still intrigued by the ever-present possibility of a higher limit next month.
The hidden downside of NPSL cards
However, unbeknownst to most consumers, an NPSL card’s true potential is decidedly negative, and by using such a card, you are essentially playing a game of Personal Finance Russian Roulette. According to a study conducted by Card Hub, credit card companies don’t report their NPSL cards’ actual spending limits to the major credit bureaus. They either report proxy limits or no limits at all, and exactly which method an issuer uses is often indeterminable.
As a result, it’s in turn often difficult to predict the effect an NPSL card will have on your credit utilization … a factor which reflects the percentage of your available credit and is a prominent factor in calculating your FICO credit score. Therefore, misleading limit reporting can spark a chain reaction causing misleadingly high credit utilization and an inaccurate credit score.
A misleading credit score can produce real problems
The decision makers who use consumer credit scores most likely won’t be aware of this, however. They will simply accept your score on face value and use it to determine whether you deserve a loan, a mortgage, an apartment or even a job, among other things. And you do not want to be shut off from these things or be stuck with bad rates because of a misleading credit score shaped by unusual credit card company reporting practices.
Besides, it would really add insult to injury knowing that you couldn’t buy a house or land your dream job because a credit card company wanted to protect its golden goose. Oh yeah, I forgot to mention that credit card companies go out of their way not to report NPSL cards’ true limits in order to perpetuate the myth that NPSL equates to unlimited spending. All in all, NPSL cards therefore just aren’t worth the risk. The only things that differentiate them from other credit cards for excellent credit are the false hope they provide and the potential for credit score damage they create. So, now that you’ve hopped that proverbial fence, checked out the grass and realized it wasn’t so green after all, wouldn’t you agree that you’re better off just sticking with a standard rewards credit card?
This guest article comes from Odysseas Papadimitriou. Odysseas is the CEO of Card Hub, a website that helps consumers get the best credit card deals and buy discounted gift cards.
{ 2 comments… read them below or add one }
I do have a NPSL card. It wasn’t a NPSL when I signed up, but at some point Chase converted it to one. I don’t know if or how much this affected my credit score though.
At one point I wrote to Chase and they offered to report a limit to the credit agencies if I so wished. Didn’t follow up though. I should though to satisfy my curiosity!
Very interesting post Joe!
Money,
Yes…an intriguing topic. Let me know if you follow up on asking Chase to report the limit to the credit agencies. I’m curious too.