What No Pre-Set Spending Limit Really MeansJanuary 3, 2011 - 8:13 am
Many credit cards and charge cards created for consumers with excellent credit come with no preset spending limit. On the surface, it seems like a person with one of these credit cards could charge to their heart’s content. But, that’s not usually the case. The term no present spending limit can be misleading.
How Credit Limits Work
Some credit cards come with an initial credit card already set. Sometimes the credit limit based on the credit card, i.e. a specific credit card might always come with a certain credit limit regardless of the applicant’s credit history. Other times, the credit limit is decided when you apply for a credit card based on your credit history. If you have good credit history, you’ll usually get a higher credit limit versus lower credit limits given to people who have poor and bad credit.
Sometimes credit card issuers automatically give credit limit increases after a certain amount of time given you’ve used your credit card responsibly. Other times, you must apply to get a credit limit increase.
No Preset Spending Limit
When a credit card has no preset spending limit, it means that card doesn’t have a credit limit that it automatically gives to credit card applicants. Instead, each applicant gets a “spending limit” based on several factors including payment history, past spending habits, credit history, and income. Each purchase is approved or denied based on this spending limit.
For example, if you normally make small purchases for around $100-$200 and you suddenly try to make a $5,000 purchase, that purchase could be denied, even if you’ve always paid your balance on time, because it’s not “normal” for you. On the other hand, if you had a $10,000 credit limit, you could make a $5,000 credit card charge regardless of your previous purchasing patterns.
Downside to No Present Spending Limit
Besides not knowing whether your charges are going to be approved or denied, there are other downsides to using a credit card with no preset spending limit. The credit scoring calculation considers your credit card balance to credit limit ratio when calculating your credit score. The higher the ratio between your balance and your credit limit, the more it hurts your credit score.
Credit card companies report no preset spending limits in several different ways. First, they may report your highest balance as your credit limit. If your current balance is your highest balance, then it looks like you’ve maxed out your credit card and your credit score is affected. Or, they could not report anything at all. In that case, the credit scoring calculation may ignore that credit card account completely, which is also bad for your credit score considering that account could help boost you to the next level. Finally, your true spending limit may be reported. This is the ideal situation as long as you continue to charge below your spending limit.
Should You Worry?
The fact that you have a credit card with no present spending limit means you have a great credit score. You probably won’t lose many points because of the way your credit limit is reported, if you lose any points at all.