A no limit credit card can be a tempting offer. After all, you never have to worry about spending past your credit limit and getting hit with costly penalties with these cards.
But how does this different type of program affect your credit score?
No limit credit cards have one important difference from regular cards that you need to be aware of.
Credit card companies can report a no limit credit card as one of three different types of accounts: an open line of credit, a credit card with a very high balance (one much higher than your average monthly spending) or a card with a limit that equals your average monthly balance.
The way the company reports your card is very important because it affects your credit utilization rate.
Credit utilization rate.
Your credit utilization rate is the ratio of your outstanding card balances to your total credit limit. Ideally, you want to keep this as low as possible for your credit score.
To get the best rating for this category, you should keep your utilization rate at 25 percent or lower per month.
An open line of credit doesn’t affect your utilization rate, so this is a non-issue. If your no limit card is reported as one with a high limit, it’s good for your score because it brings your ratio down.
Where you can run into problems is if the credit card company reports your limit as your average monthly balance. This looks like you’re maxing out your credit card each month, which is not good.
“A no limit credit card can be convenient as
long as it doesn’t hurt your utilization rate.”
Getting around the issue.
To make sure a no limit credit card doesn’t hurt your credit score, you should call up the credit card company and ask how they report the card balance.
If it’s as a high limit or an open line of credit, then you don’t have to worry. If they report the balance as your average monthly spending, you should request they raise the reported limit well above what you spend each month.
Normal credit impacts.
Beyond this one difference, no limit cards will affect your credit score the same way as a regular credit card.
When you apply for the card, it will count as new inquiry into your credit and slightly lower your score.
If you ever miss payments, your credit score will take a significant hit. However, if you always make your payments on time, your score will steadily improve.
A no limit credit card can be a convenient account as long as it doesn’t hurt your utilization rate. Use this advice to make sure this card’s impact on your credit score is a good one.
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