Lending Club Blog

Why You Can Pay Your Bill in Full Every Month and Still DamageYourCredit

This guest article was provided by Odysseas Papadimitriou, the Founder of CardHub.com—a website that helps people get the best credit card deals.

Do you pay your credit card bill in full each and every month?  Maybe you do, maybe you don’t, but no matter what, you’re probably aware that it’s best for your financial health to do so.  Such credit card use exhibits consumer responsibility and can save you a ton in interest.  Again, you probably know all this.  What you might not be aware of is the importance of credit utilization in the minds of the credit scoring powers that be or the fact that paying your bill in full might not be enough to garner a high credit score, particularly if you use a No Preset Spending Limit (NPSL) credit card or charge card.

You most likely aren’t even sure exactly what credit utilization is.  Credit utilization is a ratio of the credit you use as compared to the credit available to you.  Credit utilization ratios are calculated individually for each of your credit cards as well as for all of them collectively and included in your FICO score, the most widely-used credit score.  It’s therefore important to limit your monthly spending to around 40% of your available credit, unless your credit line is relatively small.  For example, there’s not much of a difference between spending $80 and $180 when your credit limit is $200, but there’s a significant difference between spending $4,000 and $9,000 when your limit is $10,000.

But what happens if your credit card doesn’t have a credit limit, or at least you think it doesn’t?  What happens when your credit card company won’t tell you your credit limit?  How can you maintain low credit utilization then?  Better yet, how can credit scoring agencies even calculate credit utilization without credit limits?

Therein lies the problem with No Preset Spending Limit credit cards and charge cards.  Whether you think these cards don’t have spending limits—as many people do—or you know that their limits are simply determined on a month-to-month basis and not conveyed to consumers or the major credit bureaus, it’s obvious that they throw a wrench into the credit scoring process.  However, the way in which they do so is perhaps worse than you might imagine.  According to our NPSL Card Study, issuers either don’t report limits to the credit bureaus for their NPSL cards or they report various arbitrary proxy limits.

At this point you might be asking yourself, ‘Since NPSL cards do have actual spending limits, why don’t issuers just report them?’  Great question.  Ostensibly, the reason issuers don’t report NPSL cards’ actual limits is because they are variable, changing based on your spending and payment history as well as trends in the economy.  However, the main reason issuers are so secretive about NPSL card limits is that they want to propagate the myth that NPSL cards have no limits.  It’s what makes them money; it’s what helped Visa Signature credit cards, World MasterCard credit cards, and the charge cards from American Express and Chase become some of the most popular financial products for people with excellent credit.

Unfortunately, when credit limit information is conveyed misleadingly to the credit bureaus, it can lead to misleading credit utilization ratios, which in turn might lead to a misleading credit score.  To further complicate matter, the extent of any potential credit damage is often difficult to predict because it depends on both the breadth of your credit history and the exact way issuers report their NPSL cards’ limits, which varies.

NPSL cards therefore make it difficult to maximize your credit score and might actually end up causing damage.  Given that they don’t bring any unique benefits, their use should be avoided.  Luckily there are a plethora of excellent options, like rewards credit cards, that can serve as replacements.  So compare all of the non-NPSL choices available to you and get a credit card for excellent credit that will allow you to maintain low credit utilization and a high credit score.

Monday, June 27th, 2011 at 9:35 pm

Comments (1)

  1. I didn’t realize there were credit cards where they didn’t have to
    tell you the limit? Credit companies are getting more and more
    unscrupulous with their practices!

    January 26th, 2012 at 1:31 am

Recommended

Welcome Home

Lending Club named #5 on Forbes’ Most Promising Companies List

Get ready for tax season with Lending Club’s Tax Form Guide

New Adjusted Return Metric

See more
Lending Club Awards
  • Archives z

Recent Posts

We’ve acquired a company!

Today we’re excited to share the news that we… Read More »
April 17, 2014

Lending Club customer information safe from Heartbleed Bug

You may be hearing about… Read More »
April 11, 2014

New: Loan Origination Data Update

An update for users of our platform statistics and… Read More »
April 3, 2014

Lending Club Launches Business Loans

Today, Lending Club announced the launch of business loans… Read More »
March 20, 2014

Lending Club Extends Privacy Protections for Borrowers

At Lending Club we pride… Read More »
March 19, 2014

How to Protect Yourself from Online Scams and Swindles

It is more important than… Read More »
February 11, 2014

New Statistics Charts to Help Investors Understand Returns

At Lending Club, we believe… Read More »
February 6, 2014

Welcome Home

I became a U.S. citizen earlier this month. When… Read More »
January 27, 2014

Lending Club named #5 on Forbes’ Most Promising Companies List

Lending Club has won the… Read More »
January 24, 2014

Get ready for tax season with Lending Club’s Tax Form Guide

Tax season is coming. To… Read More »
January 13, 2014