By Kristin Arnold • Bankrate.com A no-limit credit card, often considered a valuable perk for cardholders, could, in fact, damage your credit score and make any debt you take on more expensive.
"Consumers who are thinking of opening one of these no-limit credit cards may want to think how deeply their scores will be affected," says Craig Watts. The problem is something called "credit utilization," which is the ratio of a cardholder's actual debt to his or her potential debt. In other words, if a consumer has a $10,000 credit limit and a $5,000 balance, the credit utilization is 50 percent. Credit utilization accounts for 30 percent of your credit score. The lower it is, the better it is for your credit score.
However, if the card has no limit, the credit-scoring company can't make the credit-utilization calculation and that has an impact on credit scores. 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.
What's not reported matters
Card companies don't always report the highest balance.
Anthony Citrano, a partner in a Cambridge, Mass., public relations firm, opened a Citibank World MasterCard account in November of 2004. Within two months, his credit score dropped 50 points at Experian and 35 points at Equifax. Inquiries to the credit bureaus revealed that Citibank wasn't reporting his highest balance.
"It made it look like I was using all of my available credit, which is ironic, because I'm unlimited in how much I can charge on my Citibank credit card," says Citrano.
When he called the Citibank customer service department to get an explanation, he says he was told that they had received numerous complaints about his particular problem but offered no solution. Instead, they instructed him to fax a dispute letter. Citrano eventually received a letter explaining that "the consumer is protected from appearing to be over the credit limit," since he has no preset spending limit on his credit card and no limit is reported. "I understand not reporting a credit limit if one does not exist," Citrano says. "But to report zero as a high balance seems dishonest and deliberately destructive."
When Bankrate.com inquired about Citrano's problem, a Citibank media relations specialist issued the following statement: "Card agreement states that the customer has flexibility to make purchases in excess of his/her credit limit. Therefore, we do not report to the credit bureaus the revolving credit line amount. We do report the current balance to the credit bureaus and maintain that our credit reporting is accurate."
Creditors who do not report high balances are not breaking any rules under the Fair Credit Reporting Act, according to Dean DeBuck, spokesman for the Office of the Comptroller.
A customer service manager at Citibank offered Citrano the opportunity to close the card or switch to another Citibank product.
"The thing is, I like the card," Citrano says. "It gives me rewards like air miles and I have perks that are not offered on other cards. I'm a businessman who spends a lot of money using my credit cards, but I never expected that with my income and credit score and history, that I would be faced with disintegrating credit."
What consumers can do
Since credit card companies that offer no-limit cards will often use the highest balance in place of the limit to calculate your credit utilization, there is a way to improve a credit score.
Consumers who hold no-limit credit cards can work around the lack of a credit limit by running up a high balance one month and paying it off. That way, you have a high-balance number in place of a credit limit, reducing your credit utilization percentage. Of course, that only works if the credit card issuer reports the highest balance.
If it doesn't, one recourse would be to close the account. Another would be to ask your creditor to report your balance. However, according to Terry Clemans, executive director of the National Credit Reporting Association, there is no guarantee that your credit limit or highest balance will be reported month to month.
"We always hope that any and all information about consumers is reported to the credit bureaus and we can only hope that if more people learn about this the issues will take center stage," says Clemans.
However, one concern is that most people don't know what the no-limit card has done to their credit rating.
"Generally speaking, most of the affluent consumers with no-limit credit cards might not notice a significant drop in their credit score because they are very busy," says author and consumer advocate Evan Hendricks. "These are business people with busy lives and believe because they are the cream of the crop in the credit-scoring field they are getting a rewarding handshake by their creditors."
The most damaging issue about unreported information is that many consumers find out about the problem when they go to apply for mortgage or car loans.
The best way to protect yourself is to check your credit reports at all three credit bureaus to find out what information is listed.