When you apply for a credit card, the card issuer runs your credit to determine your credit-worthiness. Depending on what they find, most card companies will open your account with a pre-determined spending limit, otherwise known as a credit limit. If you have a high credit score and have proved you can use credit responsibly, you will be granted a higher limit. If you are building your credit or have a negative credit history, your credit limit will be lower.
Do all credit cards have a limit? The short answer is, no. Charge cards, also called no-preset spending limit cards, do not have a firm credit line. But being without a preset limit does not give you access to a limitless amount of funds. Rather, your spending limit will fluctuate periodically based on your income, payment history and spending habits.
American Express was one of the first card companies to offer its members cards with no limits. In the early days, account holders had to pay their balance in full each month, but now charge card companies will generally allow consumers to make partial payments. This could, however, limit your future purchases, and put you in line for some significant interest payments.
Drawbacks to Cards with No Preset Limit
Before applying for a card with no preset limit, it is important to understand some of the drawbacks to this type of account.
Since there is no predetermined limit, you may spend more recklessly. As with any credit card, you only want to charge what you can pay off when your statement arrives. The average credit card has an interest rate of nearly 17%, which means you can quickly rack up high interest fees if you are carrying a balance every month.
Additionally, carrying a balance can hurt your credit score, as it can lower your debt-to-available credit ratio, the second-most important part of your credit score. If you are using more than 30% of your available credit, your score will drop.
These cards also pose a unique problem when it comes to your credit score. Since you do not have a credit limit, your card company may report your limit to the credit bureaus as $0 if you do not currently carry a balance. Even if they do report a credit limit, it may only be a small amount. This can definitely hurt your debt utilization ratio. So before opening a card with no preset limit, read the fine print to see how your account information will be reported to the credit bureaus.
Pros of a No Preset Limit Card
Is there ever a good reason to apply for a card with no preset limit? Of course. It can be beneficial for a business owner that needs to rely on a card for most purchases. You wouldn’t want to be barred from making an important purchase one month because you have reached your credit limit. Additionally, if you own your business, using a single card to charge all expenses can make accounting easier.
Final Thoughts
Should you apply for a card with no preset spending limit? Before deciding, ask the card issuer how information will be reported to the credit bureaus. If you can control your spending and pay off your balance every month, a charge card could be a great way to earn rewards for your everyday spending.
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