How a No-Limit Credit Card Can Affect Your Credit Score

Reader Question: Does a no-limit credit card hold down the available points I would obtain on my FICO score? I hear no-limit credit cards affect the score. Does the kind of bank or finance company determine how many available points I might receive on my credit score?

It is true that a no-limit credit card can have a negative impact on your score, but there are also a lot of variables involved.

Card limits are used to determine your credit utilization ratio (a financial term that describes how much of your available credit you are currently using). For example, if I have a credit card with a limit of $20,000, and my balance is $5,000, then my utilization ratio is 25%. In other words, I'm using a quarter of my available credit. This ratio accounts for 30% of my credit score -- second only to my payment history in overall importance.

With this in mind, you can see why no-limit credit cards can be a problem. The computerized scoring models used to determine your score can't determine what your available limit is, so they are unable to determine what your utilization ratio is.

The companies who offer these no-limit cards will often provide the highest balance in lieu of an actual limit (for scoring purposes). But no all companies do this. And if they don't report your highest balance, it makes it look like you are using most or all of your available credit -- and this is what affects your score.

My advice is to do some more research, based on the information I've given you, and decide if a no-limit credit card is worth the potential harm to your score. Here's an article you might want to start with: http://www.bankrate.com/brm/news/cc/20060331a1.asp