Credit Cards

What You Should Know About Cards With No Pre-Set Spending Limit

Having no pre-set spending limit can be an enticing benefit. However, to get the most out of cards with this perk, it’s important to understand everything that goes into it. We explore what having no pre-set spending limit means, how it can help you, and how to avoid causing it from running you into financial ruin.

Last year, Chinese billionaire Liu Yiqian bought a $170 million painting using a Centurion Black card. How did he manage that? Outside of being rich, the card Yigian had no-preset spending limit (NPSL). That allowed him to charge the insanely large purchase without his bank stopping him.

Even if you aren’t buying million dollar paintings, having no pre-set spending limit can be a useful feature. If you make large purchases from time-to-time, whether for personal or business reasons, being held back by a credit limit can be frustrating. Having an NPSL card can greatly increase an individual's buying power. However, before you rush to apply, it’s imperative to educate yourself about this financial product. As with most credit cards, there are aspects of NPSL cards that can be greatly beneficial or harmful. Which of the two it ends up being will depend on the information you equip yourself with.

‘No pre-set spending limit’ doesn’t mean ‘no spending limit’. This is one of the most common misunderstandings consumers tend to have around the NPSL cards. Having no pre-set spending limit means the bank does not impose a fixed maximum amount you can spend. Instead, the card’s issuer will evaluate your financial stability month-to-month, in order to determine your limit for that period.

With a traditional credit card, if you wish to increase your credit limit, you need to call your issuer and make a request. The bank representative will typically ask why you need the increase, and then evaluate whether you qualify. To do this, they will examine your payment history, income, and your current credit score.

Cards with no preset spending limit, on the other hand, shift your credit ceiling constantly. They evaluate this based on a number of factors, including payment and purchase history. If you begin using your card more and more, and have been good about paying back your debt, the limit will likely increase. Conversely, if you begin to make late payments or run into other financial hardships, the bank may pull back your limit.

Your spending won’t influence your credit score. If you have a major purchase coming up and you don’t want it to drive up your credit utilization, putting it on a credit card with NPSL may be a good idea.

One of the factors influencing your credit score is utilization -- that is the percentage of your total available credit line you use. A card with no pre-set spending limit throws a wrench in those calculations. Even though an actual limit exists, a cardholder is not explicitly made aware of it. This presents an issue, since it doesn't allow the consumer to responsibly control their utilization. FICO, the organization that models credit scores, realizes this problem and excludes cards with no pre-set spending limit from being part of the credit utilization calculations.

Note that whether you have a credit or charge card with no pre-set spending limit, the account will be added to your credit report. The account will likely be described as “flexible spending credit card”, which denotes its status as having no credit line restrictions. If you fail to pay back your purchases on a NPSL card, it will have a negative impact on your score.

If you qualify for a NPSL card, take extra care to not go over your budget. Individuals who are trying to put away more money into a savings or retirement account will often find credit dangerously enticing. If your budget plan says you can spend only $250 a week, having a card with no preset spending limit doesn’t change that. Because these cards present us with seemingly unrestricted purchasing power, they enable bad behavior.

By their very nature, credit cards separate us from our bank accounts. Since you aren't going to an ATM to pay for things, you're less likely to be aware of your remaining balance as you spend. A monthly credit limit tends to put some curb on this, as it forces us to be aware of how much we're spending in relation to it. With NPSL, that’s removed from the equation. Unless you actively monitor our credit account, it becomes dangerously easy to forget how much you're spending. If you decide to get a credit card with no pre-set limit, keep your budget and bank accounts in mind as you shop.

Joe Resendiz

Joe Resendiz is a former investment banking analyst for Goldman Sachs, where he covered public sector and infrastructure financing. During his time on Wall Street, Joe worked closely with the debt capital markets team, which allowed him to gain unique insights into the credit market. Joe is currently a research analyst who covers credit cards and the payments industry. He earned a bachelor’s degree from the University of Texas at Austin, where he majored in finance.

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