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No Preset Spending Limit – Can Cards Affect Credit Score Negatively?

Posted on December 18, 2011

Chase Bank recently announced a big change to its Freedom cards – the credit limit will be replaced with credit access lines, in other words the cards will no longer have a preset spending limit. The concept of no preset spending limit isn’t new, charge cards have used these spending limits for years. More cards with revolving lines are replacing the “hard” credit limit with a “soft” one that can be exceeded with no over-the-limit fee.

One of the biggest problems with the no preset spending limit is that you don’t have a physical signal telling you to stop using your card. If you have a traditional credit limit and you’ve chosen not to have over-the-limit transactions processed, you’ll get denied if you try to make a purchase that puts you over your limit. Even before you get denied at the register, you can check your available credit to see how much you can purchase. Without a credit limit, you’re prone to the type of overspending that leads to missed payments, delinquencies, and other debt problems.

Credit bureaus and scoring models handle some no present spending limit accounts in a way that hurts your credit score. Remember that 30% of your score is based on your credit utilization – the ratio of your credit card balances to their limits. Creditors who have cards with no preset spending limits report the credit limit in different ways.

Some don’t report the limit at all and in that case, the scoring calculation may not use that account in credit utilization.

Other credit card issuers report the limit as highest balance ever charged on that credit card, which could hurt if your card balance is currently at that highest point. You’d look like you’ve maxed out your credit card and your utilization when you really haven’t.

Some card issuers may report a “soft” credit limit, which doesn’t reflect your true limit. Again, if your balance is at or near that soft limit, then your credit score will be negatively impacted because it seems like you’re at 100% utilization.

If you have a card with no preset spending limit or an “credit access line,” check with your card issuer to find out how your limit will be reported to the bureaus. Or, after you’ve had the card for a few months, pull your own report to see what’s listed as the credit limit. Then, you can be smart about using your card so that it doesn’t look like you’ve maxed out your credit limit.

For credit card issuers who report your limit as the highest balance you’ve charged, make sure you pay your balance down quickly so your utilization opens up. Remember that if you ever charge a bigger balance than previously, that new balance will be reported as the credit limit.

And, if the card issuer reports a “soft” credit limit, then you’ll know to keep your balance below that amount. Your card issuer will let you go over without charging a penalty, but to protect your credit score, keep your purchases below that soft limit.

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