Is there no limit to the confusion surrounding NPSL cards?

by ‎11-15-2010 09:34 PM - edited ‎11-15-2010 09:46 PM

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?

 

  1. 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%.
  2. 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.
  3. 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.

Comments
by Moderator on ‎11-17-2010 03:36 PM

I think it's worth emphasizing that the exclusion of "open" accounts from utilization applies to the newer versions of FICO.  In my case, I have two NPSL accounts (both Chase CCs).  On both EQ (a newer version of FICO, Beacon 5.0) and TU (the older TU98 version), these accounts are reported as "open".  The past high balances are also reported on both reports.  My EQ utilization is 1%, which clearly excludes the current balances and the prior high balances in the calculation.  However, my TU utilization is calculated at 4%, which does include the current and past high balances.

 

So, with holiday shopping season rapidly approaching, I'll be using my Chase cards.  My TU score might take a beating, but the EQ score will continue to blissfully ignore the expected increase in credit card use.

by on ‎11-26-2010 04:44 AM

Barry, any chance that a myFICO score report would include how it arrives at its overall utilization? As much fun as I have had matching up myFICO's listed percentage for me with my own calculated percentage, a high number of credit card holders don't know what their true utilization is.

My newest card is NPSL. Its account type is revolving and its high balance reports, so I quickly built up a whopping balance and paid it down to less than half before the statement date, thereby creating a comfortable high balance in lieu of the credit limit that's not reported.

I paid down the balance in full before the statement date a month later and am now eagerly awaiting the EQ score fluctuation based on the NPSL account going from 49% to 0%. Unfortunately, I will not know the exact impact, because another card reported earlier than expected, so the NPSL card will take my overall utilization to 0%.

That's not to say all of my cards will be reporting balances of $0. Yet another card actually has a reported balance, but it's NPSL, of the kind that's not used for utilization. But it likely counts as an account with a balance.

by ‎11-29-2010 03:26 PM - edited ‎11-29-2010 05:08 PM

Hi my-own-fico...I too can see where having the myFICO report feature a brief explanation of how the FICO scoring formula calculates utilization -- both overall and individual -- could be very helpful for folks new to credit scoring.  We'll keep it in mind the next time we revise our myFICO reporting format.  Thanks for the suggestion!  -Barry

by on ‎02-13-2011 06:11 PM

I would suggest dumping this type of card. There are too many other options if you are concerned about your FICO score.

by on ‎04-14-2011 06:30 AM

Great post, Barry!

 

The reporting of NPSL cards has confused many of us (me, included) for quite some time.  Thanks for taking some of the confusion away.

 

UBUP

 

 

 

by adlerman on ‎06-30-2012 09:49 AM

I have had a Gold American Express card for many years- it has no limit and yet i didn't see it mentioned in any post. If there's no limit how can the % of credit usage be determined by FICO?

by on ‎06-30-2012 11:48 PM

adlerman, most all FICO versions out there completely ignore charge cards like your Amex Gold, or a Green, Plat., etc., when it comes to calculating CC util. The only slightly used FICO version that includes these cards into CC util is the same TU FICO version as found here on myFICO. In that version, the balance and "high balance" are used to calculate into your FICO. This version is seldom used by lenders.

by on ‎07-09-2012 12:41 AM

wow. Good to know

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