Which credit cards can hurt your credit score?

Do you have a Visa Signature card, a World MasterCard, or an American Express Charge Card? If so, it's most likely a no-preset-spending-limit (NPSL) card, and it might be hurting your credit score.

You might think that "no preset spending limit" means you can spend as much as you like on your card. But it's not that simple.

"No preset spending limit" cards fall into two categories:

• NPSL charge cards. These allow cardholders to spend up to an undisclosed amount and require the balance to be paid in full each month
• NPSL credit/charge hybrid cards. These provide a revolving line of credit with a disclosed limit that cardholders can exceed if they pay the excess amount each month.

In both cases, there is an undisclosed ceiling on how much you can spend, meaning you could potentially be declined at the cash register.

NPSL and your credit score

A card with no preset spending limit might seem like a good idea if you make a habit of paying off your balance in full each month and you are responsible with your credit. If you can put large purchases on your card, you'll also get some of the other benefits of credit cards, such as purchase protection, return protection, price protection and extended warranties (details and benefits vary among credit card brands).

But those perks can come at a price: it could hurt your credit score. Part of what makes up a credit score is credit utilization, or the ratio of your balance to your available credit. FICO calculates the credit utilization for each of your cards, as well as for your credit portfolio as a whole. These ratios are used to calculate the "amounts owed," which counts for 30 percent of your credit score.

Your credit limit is unknown

With no preset spending limit, you might think that the card shouldn't affect your credit utilization, since while your balance might have gone up, your available credit also should have gone up (to some undisclosed, unknown limit). The problem stems from the fact that the true limit is unknown.

To keep card limits under wraps, issuers have to get creative with how they report an NPSL card's credit limit to the credit bureaus, otherwise the limits would become public knowledge. Instead, they report the revolving credit limit or a high balance held for a period of time, or they don't report a limit at all.

Creative reporting

If the revolving credit limit is reported, it can negatively affect your credit utilization because you are allowed and even encouraged to exceed that limit, so your ratio could be 100 percent or higher. If the issuer reports a high balance, your credit utilization will still be high because your spending doesn't fluctuate.

For example, if you typically charge $3,000 per month, your high balance as reported to the credit bureaus might be $3,500. Charging the usual $3,000 every month means your credit utilization will be 86 percent. If your issuer doesn't report a limit, it's treated as an open line of credit and shouldn't affect your score. The problem is that it's difficult to figure out which reporting method your issuer uses.

Consider other options

When it comes down to it, NPSL cards probably aren't your best bet. Their main feature is the absence of a spending limit, yet there is a limit, it's just not disclosed to the cardholder. That unknown, combined with the potential for the reporting to negatively affect your credit score, makes NPSL cards riskier than other types of credit cards.

Better yet, avoid interest charges and fees by opening an online savings account dedicated to big purchases and set up automatic contributions each month to reach your goal.

• Get started saving by finding the best savings account now
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