At first, I thought its pretty cool to have a card that doesnt have a spending limit (though the notice says No pre-set spending limit does not mean unlimited spending). But later, a question came up: how a no-limit card will affect my credit score?
With other cards that do have a credit limit, the credit utilization ratio (the ratio between used credit and the total credit) accounts about 30% in the calculation of credit scores, according to myFICO. However, if its a card with no limit, then there will be no utilization ratio. Suppose I charge $10 on the card, what the ratio would be? What if I charge $10,000?
I then did a search and found this article, Credit cards that hurt your credit score, on Bankrate.com. Though the article is more than one year old, it explains how credit score could be affected by the no-limit cards. And it turns out that the idea of having a no-limit card isnt really as cool as it appears because
if the card has no limit, the credit-scoring company cant make the credit-utilization calculation, and that has an impact on credit scores.
I am fine if the card doesnt have an impact on credit scores, but what really happens could be that I only have a $10 credit limit as oppose to no-limit and if I make a $10 charge on the card, I could end up with a utilization ratio of 100%. Heres why:
credit card companies that offer no-preset-limit cards will, typically, allow credit-scoring companies to use the highest balance in place of the limit to calculate your credit utilization. So, if the cardholder has a $20,000 balance one month, that becomes the limit used for credit utilization.
So the card could have no impact on total credit line ($10), but could be a big negative on credit score (100% utilization ratio). The article offers two ways to deal with no-limit card:
1. Run a huge charge on the card, thus, if the card company indeed reports the highest balance as credit limit, that will be the credit limit; or 2. Close the account for good.
The first one could be done with a 0% balance transfer which I assume I will get with the new card. However, since Citi is now charging 3% fee on balance transfer, the arbitrage is not as profitable as before. I can still do it for the sake of getting a higher limit. The problem is, from the article, Citi doesnt seem to always report the high balance as credit limit.
Actually, since Citi revised Dividend cards reward policy last year, mine has been sitting in the drawer collecting dust. I have no plan to put the card back into my wallet, therefore, I may just cancel the card, which was opened in 2002, and move the $13,000 credit line to the UPromise card. Another reason to close the card is there will be a new account number on the World MasterCard when it arrives, essentially terminates the old card anyway.
Many credit card holders would like to obtain a higher credit card limit. The main purpose for this is that a higher credit card limit enables the purchase of otherwise unaffordable merchandise. First of all, credit card holders need to remember that to get a higher credit card limit, they must abide by the terms and conditions of the issuing credit card company or bank. Here are seven tips toward obtaining a higher credit card limit: 1. The most important thing to do toward getting a higher credit card limit is to prove your credit worthiness. This is the first thing that banks and companies look for when approving a higher credit limit. 2. Always spend within your credit card limit. Doing so communicates to your credit card lender that you are capable of controlling your expenses. 3. Use your credit card regularly. Don't keep your credit cards for emergency use only. If you use your credit cards just occasionally, banks and credit card companies will be unable to understand your spending and payment behavior. By using your credit card minimally, most banks and credit card companies will be reluctant to give you a higher credit card limit. 4. Don't make minimum payments. Instead, try to pay for the entire outstanding amount. This method of repayment will usually give you a better chance of getting a higher credit card limit. 5. Attract positive attention from the credit card company or bank by paying interest finance charges once in a while. Obviously, this is not advisable on a continual basis and should only be used as a last resort to increase your chances of getting a higher credit limit. Proving to credit card companies and banks that you are good borrower can be a convincing way to get a higher credit limit. But be careful because this strategy also means that you will be paying finance charges which can accumulate in a hurry. 6. Avoid late payments. Not only will your payment increase, but you will also have to pay an additional fee for late payment. This will also decrease your chances of getting a higher credit card limit. 7. The best and simplest strategy for obtaining a higher credit card limit is to use your credit card wisely. Always keep in mind that credit card companies keep a record of your transactions and payment patterns, so always pay your credit card bill on time. The bottom line is that your performance on record at your bank and credit card company will determine whether you'll get a higher credit card limit or not. And always remember, a higher credit card limit means greater purchasing power, but it also increases the risk of your having to pay greater interest charges and other processing and late fees if you have difficulty repaying the higher balances.
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