My head started hurting the other day as I tried to make sense of what I was reading in the FICO Forums about no preset spending limit (NPSL) cards and the various ways in which their credit limits, highest balances, and account types appear on credit reports – and what these reporting differences can mean for your FICO score.
If you don’t yet know about NPSL cards, these World MasterCard and Visa Signature cards are “hybrid” cards that combine the features of a typical credit card, where you can revolve the balance or pay in full each month, with those of a charge card, where you can charge without a limit as long as you pay in full by the next billing date.
If you were to look at a credit report that included multiple NPSL cards from different card issuers, you might see that some cards are reported with credit limits, others aren't. Some might include the highest balance (typically the most you've ever charged on that card), others might not. Some might report neither a credit limit, nor a highest balance. Some could report the account type of a NPSL card as revolving (credit cards), while some could show them as open credit lines (charge cards). And not to be outdone, there are even indications that a credit card issuer may report one way one month and differently the next!
You may already be wondering how a "no preset spending limit" card can have a "limit." Sound like a contradiction? Well, it is. Well, sort of.
While some issuers of these NPSL cards claim they don't have a "credit limit," there is, in fact, a designated dollar amount: 1) below which you can revolve or pay off each month, just like a credit card; and 2) above which you're allowed to charge as much as you'd like, as long as you bring the balance down below that designated dollar amount within the next billing cycle.
Why don't some lenders report limits or balances on NPSL cards? The compliance lawyers for some card issuers tell us that these cards truly have no credit limit and that reporting a credit limit would be against their contracts with their card holders. They also state that reporting a highest balance as a proxy for a credit limit, which is typically done for credit cards when the credit limit is missing, would misrepresent the credit utilization for that account – and for that reason the highest balance is also not reported.
Why do the credit limit, highest balance and account type matter to the FICO scoring formula? The answer is credit utilization, which makes up almost 30% of your FICO score.
First, it's helpful to understand that the FICO formula looks at your credit utilization in two ways: each revolving card's utilization percentage and the overall percentage comprising all revolving balances and limits. As part of the credit utilization calculations for a single credit card, the card balance is divided by the credit limit to arrive at a credit utilization percentage. To determine the overall credit utilization percentage for all of your cards, the total balances are divided by the total credit limits. For both types of calculations – single and overall – if no credit limit is present, again the highest balance is generally used as a proxy for the missing credit limit.
What if neither the credit limit nor the highest balance is reported for a card? In these cases, the formula excludes the card entirely from all credit utilization calculations and calculates the total credit utilization percentage using your other cards that include either a credit limit or highest balance.
Now that we've covered how the absence of credit limits and highest balances impact credit utilization, let's take a look at the differences in scoring between revolving and open account types. This one is pretty straightforward, as the most recent FICO scoring models include revolving accounts in credit utilization calculations, but exclude open type accounts.
Is your head hurting now along with mine? How about we check in on what some of the holders of these NPSL cards have to say?
In one FICO Forums discussion, we heard from a Forums member who has three NPSL cards – the only cards she has – and is wondering how they will impact her FICO score. In another discussion, we're told how the credit limit and highest balance appear differently from credit bureau to credit bureau for the same NPSL card.
To really zero in on this question of how differences in reporting impact FICO scores, let's consider a few different scenarios to see what can happen to your credit utilization percentage when these differences occur.
For NPSL accounts reporting as revolving, we'll look at an NPSL account having a credit limit of $10,000, a highest balance of $1,000 and a current balance of $500 – with the $500 current balance being the one thing reported consistently in all examples:
- When both credit limit and highest balance are reported: utilization = 5% ($500/$10,000)
- When credit limit is not reported and highest balance is reported: utilization = 50% ($500/$1000)
- When neither credit limit nor highest balance are reported = account excluded from utilization
As you can see, such variations in reporting can easily result in a wide range of utilization percentages – 5% to 50% or higher – which can result in a wide range of FICO scores across the three bureaus for the same person with the same cards. Again, cards reported with the "open" account type are excluded from utilization calculations, and thus have no impact – good or bad – on the most recent versions of the FICO score.
What to do if you have a NPSL card and want to make sure it's helping more than hurting your FICO score?
- Always pay your bills on time! While a no-brainer of sorts, be aware that your repayment history on credit obligations is the biggest single factor in your FICO score at about 35%.
- Monitor your credit reports regularly to ensure your NPSL cards – and all credit accounts – are reporting correctly. Dispute any inaccuracies by contacting the card issuer and the credit bureau.
- Keep your credit card balances as low as possible on NPSL cards. This way your credit utilization will be low and your FICO score will benefit no matter how you slice it.
Oh, and you may also want to keep some aspirin handy.
Author: Barry Paperno serves as community manager for the myFICO Forums and consumer operations manager for FICO, where he has advised consumers and businesses on FICO credit scoring since 1995.
myFICO is the consumer division of FICO. Since its introduction 20 years ago, the FICO® Score has become a global standard for measuring credit risk in the banking, mortgage, credit card, auto and retail industries. 90 of the top 100 largest U.S. financial institutions use the FICO Score to make consumer credit decisions.
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