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When Doing the Right Thing Hurts (Your Credit)

This article was written by in Credit. 8 comments.


It’s been many years since I’ve paid interest on a credit card balance. I don’t think I’ve missed a payment, either, thanks to automatically scheduled transfers from my checking accounts. I know that many regular Consumerism Commentary readers are like me, as well, and rarely pay a fee that’s unnecessary. (Keep in mind I recently paid a $10 fee to Wachovia for accidentally scheduling an investment twice.)

The good habit of paying your credit card balance in full — usually to reap the rewards at the lowest cost possible — can actually cost you tens of thousands of dollars in the long run. Certain credit cards, like Visa Signature, World MasterCard, and American Express charge cards, have no pre-set spending limit. Although they may have a credit limit shown on your statement, your card won’t be declined if you go above that limit — at least, not until another unadvertised limit, much higher than the reported limit.

But these cards with no pre-set spending limit also do something somewhat sneaky behind the scenes. Normally, credit cards report your balance and your limit to the credit card reporting bureaus. Equifax, Experian, and Transunion use these numbers to determine your credit utilization ratio, one of the most important factors of your credit score. Rather than reporting the real, hard spending limit, the point at which the card will be declined, the card issuers substitute another number, usually your highest balance across the past few months.

When FICO or the reporting bureaus calculate your credit score with this number rather than your true, higher credit limit, the results are drastically skewed. If your highest balance on a card with a hard limit of $30,000 is $400, and today’s balance is also $400, the issuer reports $400/$400 to the bureaus rather than $400/$30,000. As a result, if this were your only card, your credit utilization ratio is 100% rather than 1.3%. A higher credit utilization ratio results in a lower credit score. A ratio of 100% should mean that you are a risky consumer, but here it just means you don’t spend much and you pay your balance in full.

In the past, credit card issuers could see this lower credit score and decide to raise your interest rates, but some of that type of activity has been curbed through the Credit CARD Act of 2009. More importantly now is the idea that your lower credit score, as a result of your responsibility with credit cards while using a type of card that does not report your hard limit, you could possibly qualify for worse interest rates for loans such as mortgages.

This is a slippery slope, where doing the right thing hurts your finances in a way that’s not entirely obvious on the surface. Here are my suggestions if you are concerned about the effect of Visa Signature, World MasterCard, or American Express on your credit score.

  1. Get your three free annual credit report from annualcreditreport.com (one from each bureau).
  2. Review your credit report to make sure all the information is correct.
  3. Get your free credit score from credit.com or CreditKarma.
  4. Compare your credit account information on the reports with your latest statements to determine which cards don’t report credit limits.
  5. Consider moving those balances and using only cards that report a legitimate credit utilization ratio and retiring your offending cards to a safe place, never to be used.

Looking through my wallet, I see my main cards are Visa Signature and World MasterCard. Maybe it’s time for a change. I checked my credit score recently, and although it dipped a few months ago and returned recently, it is still high.

Updated June 20, 2014 and originally published December 17, 2010. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 8 comments… read them below or add one }

avatar Joe Taxpayer

I misplaced a CC. When a merchant asked me for Driver’s License as ID, I showed it and after purchase slipped the CC back in behind license. Thinking it lost, I canceled and got a new card two days later.
Today I saw that my score dropped 782 > 774 lost 8 pts, and the Ave age of accounts fell from 77mo to 69 mo a C rating for this metric.

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avatar Luke Landes ♦127,435 (Platinum)

That’s really interesting. I would think that the issuer would just offer you a new number and replace your card, maintaining your history. I’d give them a call and ask why that wasn’t the case.

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avatar eric ♦1,549 (Half-Dollar)

This has happened to me once before. Citi had a security breach and issued me a new account number. Now on my credit report, it shows that my previous card/account has been closed and a new account created. The average age is of course also affected.

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avatar Ann-Marie

Sneaky, indeed! This is something that a few credit card companies used to do with credit cards designed for those with lower credit scores, therefore perpetuating those lower scores. IMHO, credit scores are tricky enough without all these extra tricks.

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avatar LifeAndMyFinances

To be honest, my wife and I haven’t checked our credit since last year. We’ve been so focused on paying off our debts and building up some savings that credit hasn’t even been on our mind.

We plan on paying off all of our debts by April, 2011! Once we do this, we may consider getting a credit card again.

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avatar MR ♦295 (Nickel)

I didn’t realize that some credit card companies did such practices! That just seems outright wrong!

I’ve always had a high credit score in the past, but I haven’t checked in years since buying our house. It looks like it’s time to start checking it out again!

Thanks for the heads up about those card you mentioned! It was all news to me!!!

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avatar Chris

No-preset spending cards should actually no longer have an effect on your credit score unless they are reported incorrectly to the credit bureaus. Scores that can be purchased from myfico.com (the official FICO website) are often different versions than the one lenders see.

The TransUnion ’98 scoring algorithms, which are the scores sold to consumers, are different than the ones used by lenders. TU 98 scoring will factor no pre-set limit cards into overall utilization, but the updated versions of TU FICOs used by lenders, as well as updated algorithms of Equifax and Experian, do no factor in AmEx Charge Cards, World MCs, etc into utilization.

Additionally, if anyone is still worried, what can always be done is to pay the balance before the statement “cuts” and effectively having a $0 balance on the card as shown on credit reports.

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avatar Anonymous

Sheesh — it’s tough to stay on top of all of these credit score issues. Without monitoring a score each month, its difficult to know what impact everyday actions have on a score.

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