Don’t Forget the “P” in NPSL

This guest article comes from Odysseas Papadimitriou, CEO of Card Hub, a leading online marketplace for finding the best credit card deals.

Quick, without looking at your statement:  How much available credit is left on your credit card account?  Perhaps you know an exact figure, maybe you have a rough idea, but I’d be willing to bet that most consumers certainly wouldn’t feel comfortable using a credit card to make purchases not knowing just how much they have to spend.  For this very reason, you may want to steer clear of No Preset Spending Limit (NPSL) credit cards and charge cards.

While people often forget about the “P” in the above acronym and think that NPSL credit cards do not have monthly spending limits, they are unfortunately mistaken.  There is no such thing as an unlimited credit card.  There is, however, something unusual about NPSL cards.  Unlike most credit cards—which from Day 1 have well-communicated credit limits—NPSL cards have limits that are determined on a monthly basis, depending on things like the general state of the economy as well as the cardholder’s credit score and spending/payment habits.  Not only that, but these monthly limits aren’t even communicated to either the cardholder or the three major credit bureaus.

What’s the rationale?

Why would a credit card company intentionally keep a customer’s limit secret, you might ask?  Well, it’s quite simple actually:  to add to the illusion that NPSL cards are indeed limitless.  This semi-well-kept secret has played a big part in making American Express charge cards as well as Visa Signature and World MasterCard credit cards some of the most popular products for people with excellent credit.

What’s the downside?

People using NPSL cards should have two primary concerns:  having purchases get unexpectedly declined at the point of sale and credit score damage.  When you don’t know your credit card’s limit or you aren’t even aware that it has a limit to begin with, you’re bound to run into usage problems.  This could certainly prove problematic if, for example, you head to Best Buy with the kids to buy a new TV and your excitement is brought to a screeching halt when the transaction is declined at the checkout counter.

What’s more, it would be pretty tough to keep your credit utilization (the ratio of your spending to your available credit) low, which is where creditors want it, if you don’t know exactly how much credit you have to your name.  Credit scoring agencies have the same problem, as issuers often provide them with misleading information about their NPSL cards, making it difficult to calculate accurate credit scores.

You see, credit utilization—which is calculated for each credit card you have as well as for all of your cards combined—is a key component of the “Amounts Owed” section of one’s FICO score, the most commonly used credit score in the U.S.  And rather than simply reporting the actual credit limits they give their NPSL customers, some card issuers relay proxy limits, while others either provide a customer’s high account balance over a certain period of time or don’t even report credit limits at all.  Given this habitual dissemination of inaccurate information and the fact that each issuer does not rely on a single method of NPSL card reporting, it’s often next to impossible to predict how a given NPSL card will impact your credit standing.

What now?

In case you were wondering, NPSL cards don’t have much of an upside.  As we’ve learned, these cards aren’t unlimited, and while the lack of a set limit may lead to optimism that you could be afforded additional spending power “next week,” that’s certainly outweighed by the uncertainty, inability to spend confidently, and potential for credit score damage that are also byproducts of NPSL card use.  It’s therefore probably in your best interest to steer clear of these cards for the time being.  There are plenty of credit cards for people with excellent credit that provide equal or better rewards or whatever perk you’re interested, so why settle on a card that will only maximize your headaches?


How To Check Your Credit Score

Keeping abreast of your credit score is not only a practical move against potential fraud, but it also keeps you aware of your credit standing in case you want to take on a loan in the future. We all know that a good credit score will also mean lenient interest rates, which is why it is highly important to take note of your credit score regularly.

Getting Your Credit Report

There is only one website where you can get a copy of your three credit reports. You may download your credit report annually at annualcreditreport.com. This is the only website that offers this service as it is mandated by law.

The credit report includes details of your credit accounts, debt balances, and payment history. However, the report will not show you your credit score. The credit score is what lenders will use to check your credit worthiness. However, getting your annual report will allow you to see any discrepancies, giving you time to report any mistakes before you get a loan.

Obtaining Your Credit Score

One place where you can get your credit score is CreditKarma. This website provides a monthly tracking of your credit score plus tools to help you understand your credit health. The site offers their services for free, unlike other websites which may charge you with other services. Some websites attract you to a free credit score but may consequently bill you about $15 per month for either credit monitoring or protection. If you need constant access to your credit report and scores, credit monitoring may be useful. However, there really is no need to pay for the service if you just want to get an estimate of your credit score.

Tips to Remember

Checking for your credit report or credit score will not cause your credit score to go down. Websites such as CreditKarma and annualcreditreport.com will ask for your Social Security Number in order to verify your identity. When using other sites that offer credit score services, be sure to check the authenticity of the site. Websites that ask for your credit card number may also attempt to charge you monthly fees for credit protection or credit monitoring.

Running through your credit report annually and checking your credit score will not take too much of your time. However, doing so will help you save a lot of dollars in the future when you do finally plan to make that loan.


Deciphering Your Credit Report

It’s advisable to check your credit report at least once a year to gain an understanding of how your credit score appears to your creditors. The thing is, when we do check our reports, we have trouble making sense of it. So how do you read a credit report?

There are four main parts to a credit report. Your personal profile, credit history, public records and inquiries. Read over each section of the report and scan it for errors.

1. Personal Profile – Your personal profile contains all your basic information such as your name, address, birth date, social security numbers, and previous addresses and employers. Misspelling of your name can be common when creditors record your name wrong. However, it is important to check if there is any discrepancy in address as this can alert you of a possible identity theft.

2. Credit History – This is where you can find an itemized list of your current and past accounts, including balances and arrears. You will find the name of the creditor and account number for each bill. There will also be a column that identifies the nature of the account such as individual, joint, authorized user, terminated, and others. Other information such as the history of the account may also be seen.

This part of the report will show whether you have a high credit limit and it also indicates the number of installments you have left for any loan. The balance remaining on the account, any due amounts, and the status of accounts will be noted.

Creditors will also check whether you have more revolving accounts than installment accounts. Revolving accounts is one wherein there is no fixed ending date to the debt. Installment accounts are when there are fixed payment and a specific ending date. Revolving debts are less attractive to creditors and will not help build your credit.

3. Public Records – This report contains records that will also be seen in local, state and federal courts. This shows whether you have declared bankruptcy, have tax liens and other monetary cases. Even overdue child support records may be included. Public records will remain with your credit score for seven to ten years and can be a negative blow against your credit score.

4. Inquiry – Inquiries are classified between hard or soft. Hard inquiries are those initiated by you, while soft inquiries may come from companies that wish to offer promotions on credit and current creditors that are monitoring your account. It is generally not advisable to have too many creditors view your credit report as the frequency of inquiries can appear as a negative to some lenders.

Finally, your credit score may be seen in your report. This score will determine whether an individual will qualify for a loan or not. High credit scores will mean better rates for the borrower, while lower rates can also leave the borrower subject to loan denial. Credit scores can range from 300 to 850.


No Credit Check Refinance – Is it possible?

When you apply for a mortgage one of the very first things you will need to do is give your social security number so your broker or bank can pull your credit.

What if your credit is terrible and you don’t want your credit to be pulled?

In all honesty it is very unlikely that you find a lender willing to fund a mortgage without your credit being check, although there are a few exceptions to this rule.  Your credit score is not the only, nor the most important factor in determining if you qualify.

Lenders and banks understand that some people with a stronger financial portfolio may have poor credit.  (stronger in the sense that you are able to comfortably afford your mortgage payment.)

It comes down to risk for lenders.  If you can show that even though your credit is poor you have the means to make your mortgage payment every month you may be able to qualify for a refinance.

If you have missed a mortgage payment in the previous year or two it is unlikely you will qualify because this dramatically weakens your position.  You want to show good payment history, strong monthly income and it is very important that you have money in reserves.  Which simply means money in savings, a liquid retirement account or something similar.

If you can show the lender you can comfortably make the payments and are a low risk borrower you may be able to refinance with less than stellar credit.

Here is a break down of the important factors when qualifying for a mortgage.

  • DTI (Debt to Income) – If your DTI remains under 30% it shows you earn enough money to comfortably make your mortgage payment.  The lower the better.
  • LTV (Loan to Value) – The lower the Loan to Value on your home the stronger it is.  If you only owe 70 or 75% of your houses value you become lower risk.
  • Income – Income is a main factor in determining your DTI.
  • Assets – If you can show 6 months of assets, this will really strengthen your file tremendously.  Assets, particularly liquid assets, help show that even if you lose your job or run into financial difficulties you can still make your mortgage payment for a number of months.
  • Payment History – A clean mortgage payment history (meaning you have no 30 day late payments) shows you are a trustworthy borrower.

In conclusion if you can show strength in the other areas of your mortgage than the credit score factor may be minimized or eliminated.

Some people never even build credit and literally have no credit, but can still purchase a house.  This is because these other factors are strong.  Plus in this case if we are looking to refinance the fact you already own the home helps tremendously.


Using Prepaid Credit Cards to Build Credit

First of all the question needs to be asked, does using prepaid credit cards build credit?

The answer is yes and no.  Prepaid credit cards are simply cards you use to spend money you already have.  They are exactly like a checking account debit card except without the checking account.

Because of the nature of prepaid cards some of them do not report to the credit bureaus. You do not actually borrow money with prepaid cards like you do with a standard credit card.  You essentially “load” money onto the card, say $200, and you cannot spend more than the amount you placed on the card.

So you may ask, why use prepaid cards at all?

Good question, there are a few reasons including the security.  Prepaid cards are much safer than cash and if you are unable to qualify for a checking account a prepaid card is an excellent alternative.

In some cases they do report to the credit bureaus and help your credit.

Some cards have what is called a credit builder feature.  Even though the credit builder feature typically costs money on a prepaid card, sometimes it is worth the cost to help rebuild your credit.  If you have a history of maxing out credit cards, missing payments or your credit is to low to qualify for any credit cards this could be the best option for you.

Credit cards can be a trap for irresponsible borrowers, but a prepaid credit card is an alternative that eliminates the ability for you to spend money that you do not have. Plus you will not lose money paying the interest on credit cards.

See this example of a prepaid card: You can click the card or Apply Now to get more information on that offer.

CardDescriptionApply


SilverCard Prepaid MasterCard®
SilverCard Prepaid MasterCard®
  • Perfect for Gov./Benefits Checks recipients
  • $0 activation with rebate*
  • 100% guaranteed approval*/no credit check
  • Free direct deposit of your pay or gov check
  • Anywhere MasterCard Debit card is accepted
  • No overdraft fees or minimum balances
  • Online Checking - Electronic or paper checks


Apply Now!

Better options for building credit.

If a prepaid card is all you can qualify for or feel comfortable with then let that be your option, but there are other choices for building credit even if you have a low credit score.

  • Store Credit Cards – Getting approved for a store credit card, like at department stores or Walmart type stores,  is often times easier than qualifying for a credit card.  This is a good place to start building credit.
  • Entry Level Credit Cards – Companies offer entry level cards that pretty much anyone can qualify for.  (Click here to see a list of these cards).
  • Read our Building Credit Guide so you do not make your situation worse.

Whether you are trying to start building credit or rebuild your credit it is important that you do it correctly and wisely.  Good credit will save you thousands of dollars the same way bad credit will cost you thousands of dollars.

If you have any experience, good or bad, with prepaid credit cards please share with us in the comments.