If you are familiar with the way credit scoring works, you probably know that avoiding being “maxed out” on your credit cards and other revolving accounts generally impacts your score in a positive way. You might also be aware that the FICO score – the most popular model – dedicates 30% of its score calculation to how much of your available credit you are using. The lower percentage of available credit you are using, the better your FICO score will be. It would seem then that logic dictates that a no-limit credit would be the best possible solution for this part of your FICO score calculation, since you theoretically have an infinite amount of available credit. But this is one place where logic fails.
The potential issue
The possible problem stems from the fact that, like other popular credit scores, FICO generates your numerical credit rating based on the information that is in your credit file. One of the numbers the mathematical formulas look for is the credit limit on your revolving accounts, which includes credit cards. Depending on how the account is reported by the issuer of the credit, the credit scoring model may either completely disregard this your utilization percentage or it may do something much, much worse for your score: it may use the high balance on the card as the limit in lieu of a stated limit. For example, let’s say you don’t use your no-limit credit card all that much and you’ve never charged more than $100 on it, but your car recently broke down and you put the repairs on the card. If a particular scoring model uses the high balance on the card in your score calculation, the $1,000 for the car-related expenses looks like not only your balance, but also your credit limit. In other words, you appear to be using 100% of your available limit on that card. According to FICO, this will have a major negative impact on your score.
As alluded to above, the way the account is reported can make a big difference in how information from a no-limit card is factored into your credit score. Traditional credit scores can only generate a number based on what is in your credit file and what is in your credit file comes from companies that report financial information for you. So to make sure you don’t have any credit score problems with a no-limit credit card, you need to go to the source of the information. Here’s how:
1. Call the company who provided you with the no-limit card (or line of credit) and ask them to report a limit for the card to the credit reporting agencies. It may seem that the card issuer doesn’t have any limit in mind, but if you try to buy a luxury jet with the card, you will find out that there is indeed a limit!
2. If the creditor claims they are not able to report a limit for this type of account, ask them about options for transferring your balance to an account with a limit. The optimal solution is to have your account history transferred to the new account since the age of the account and any on-time payments can help your score.
3. If you are not able to transfer the account history to a new account, consider paying down this particular card and/or not using it at times when you need your credit scores to be he high, like when you are applying for any type of financing.
4. If you are able to get a balance reported for your previously no-limit card, make sure to dispute the credit limit for the account with Equifax, Experian, TransUnion via their websites (find each site by tacking “.com” onto the end of the credit bureau’s name). This is the best way to make sure this information gets updated accurately. After you have done this, it’s a good idea to get copies of your credit reports by calling 877.322.8228 or visiting www.annualcreditreport.com to check for yourself that the information is now correct.
Ironically, no-limit credit cards are often marketed with the idea that they are automatically great for your credit scores because you will never be maxed out or over the limit. However, it’s important to understand just how the card is being reported to the credit bureaus to truly know how the card is impacting your credit score.