Avoid A No-Preset-Spending-Limit Credit Card Nightmare
Imagine this: You have always been an exemplary credit user, you pay your bill on time and in full each month and you never max out your credit cards. You have a FICO credit score of 720 and have long used three credit cards to fund your spending: a business credit card for certain business expenses, a Best Buy card because you shop there regularly and a general-use credit card that you use for your day-to-day purchasing. However, you recently made the decision to trade in your general-use credit card for a No Preset Spending Limit (NPSL) card—a World MasterCard credit card, a Visa Signature credit card or one of the American Express charge cards—because you believe it will give you unlimited spending power. You figured you deserved a reward for having used your credit so responsibly, and you value unrestricted spending over getting travel perks or cash back from a traditional rewards credit card.
For a while your decision seemed like a good one. You ended up opening a Bank of America World MasterCard, and while this card actually did have a revolving credit limit, you were encouraged to exceed it as long as you paid the excess each month. So you did.
You were still paying your bill in full every month, but you now had the ability to use your credit card for a higher percentage of your monthly spending. This allowed you to pay for your daughter's wedding in June and your family's vacation in August with your card. However...no, that must be wrong! It's December and you just checked your credit score. Hold on, how could that be? It went down 30 points in the past year! That must be a mistake, right? You call FICO—the largest credit scoring agency in the United States—to get to the bottom of things. They tell you that no mistake has been made, that your credit score dropped because your credit utilization has been 80% for the last year. What does this mean? And how did it happen?
Well, credit utilization is a balance-to available-credit ratio that FICO calculates individually for each one of your credit cards as well as for all of them in combination. Each of these ratios is factored into the "Amounts Owed" section that comprises 30% of your overall credit score. A simple definition of the term does not explain why your credit score took a hit though. The truth behind this mystery is that your NPSL credit card caused your credit utilization to skyrocket. This, in turn, occurred as a result of the way your issuer reported your card's credit limit to the credit bureaus.
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