Hidden dangers of No Pre-Set Spending Limit credit cards

One common type of credit card that is offered is known as a No Pre-Set Spending Limit (NPSL) card, which do not have an explicitly-stated credit limit, and consumers usually do not know how much credit they have available at any given time.

These cards do have a credit limit, according to Forbes, so their name is slightly misleading. Such cards usually come in two forms. One is a charge card with an unknown but existent credit limit, and another type is a standard credit card with an unknown, revolving line of credit that consumers are encouraged to exceed, as long as they are able to pay it back every billing cycle.

The problem with such cards is that their effect on a credit score is difficult to track, according to Forbes. A consumer’s credit score depends on his utilization ratio, which represents the portion of his available credit that is he using. Such cards often report utilization ratios of close to 100 percent, which is damaging for a credit score, as it makes a borrower appear risky. It may also be more difficult to track utilization ratios using an unknown credit limit for individuals who are trying to repair a bad credit history.

While NPSL cards may be appealing because of the illusion of no spending limit, their financial advantages are relatively scarce, according to the news source.