American Express has long heralded its "no-preset-spending-limit" charge cards, conveniently ignoring the fiction built into the phrase. As cardholders sometimes learn in embarrassing situations, "no disclosed limit" might be a better term.
But that's not the only drawback to these cards, or to the similar, no-preset-limit Visa Signature and World MasterCards now offered by a variety of banks. Their biggest drawback, according to a new study by CardHub.com, may be this little-known fact: Having a no-preset-limit card can depress your credit scores.
The reason is a little complicated, so bear with me.
The key is how any credit card can affect your "credit utilization" ratio - a measure of how much of your available credit you've used. According to FICO, the credit-scoring company, credit utilization is a key factor in the "Amounts Owed" category of its scoring model, a category that accounts for about 30 percent of your score.
What is "credit utilization"? Essentially, it's just a ratio of the amount you've borrowed over the amount your creditors are willing to lend. If you have a conventional Visa card with a $10,000 limit, and your balance is reported as $1,000, you'd have a ratio for that card of 10 percent. Add up all your balances and all your limits, and you know your overall ratio - anything above 60 percent is considered uncomfortably close to maxed out, says CardHub CEO Odysseas Papadimitriou, a former executive at Capital One.
So here's the rub: That secret credit limit - or whatever a card issuer reports as the credit limit, even if Amex would actually let you buy a BMW with the card - can obviously affect that ratio. But the new study requested answers from 10 card issuers, and found no consistency in how they handled even that basic question.
Two of them, Chase and CitiBank apparently had the best practices for not hurting your credit score because neither provides credit-utilization data that can be used against you, according to CardHub. I say "apparently" because Chase first answered CardHub, then retracted its answers and declined to participate further, so CardHub had to rely on a letter in which Chase described its practices to a customer.
Five issuers - Amex, Bank of America, Capital One, Wells Fargo and USAA - cooperated but acknowledged that their no-preset-limit cards were indeed affecting FICO scoring, rating them a "Good" for transparency but a "Fair" for their impact - a generous rating, it seems to me.
And two issuers, HSBC and U.S. Bank, declined to answer questions about how their no-preset-limit cards might affect scoring, so the best they deserve is a "Cardholder Beware" rating, though CardHub generously just gave them an "Unknown." (One of the 10, Discover, said it doesn't issue cards without preset limits.)
Among the cards that acknowledged a potential FICO impact, four of them said they either report a credit limit - oh, the mendacity - or might. You can find CardHub's study, including a chart describing their practices, by clicking here.
Two of the issuers, Amex and Bank of America (for its Visa no-preset-limit card), say they use a "high balance" instead of a credit limit. Amex, for example, reports your highest balance during the last 18 months, and FICO uses that as your limit, Papadimitriou says.
You can see the consquences of Amex's practice. If you use your Amex card consistently for about the same amount each month, it will consistently report a very high utilization ratio - though never above 100 percent. If you go up and down, you're more likely to have a lower ratio reported, unless your credit report is pulled during a high-balance month.
There are more twists and turns in these practices than you might imagine. The CardHub study says, for instance, that no-preset-limit cards that report undisclosed limits tend to report low limits relative to your usage, so your utilization ratio for that card could actually exceed 100 percent.
If you're concerned about the effects of a no-preset-limit card on your credit score, you should contact your card company and complain.
But Papadimitriou recommends a different approach: Switch to a card that doesn't hide the ball. Credit scores are too essential nowadays to mess with a card that could play games with yours.