Monday, January 3, 2011

My Disappearing Credit Limit

Wrapping up my finances in 2010 turned out to be more difficult than it was supposed to be. There was the Merrill Lynch trading account I mentioned earlier, and then came this other incident with my credit report. About 3 weeks ago, I checked my credit report to make sure that there were no mistakes and everything was up to date, as I always do at the end of the year. Sure enough, I discovered something very odd. My credit utilization was a whopping 44 percent. What? How did this happen? I've been very careful about keeping my utilization below 15%.

Credit Utilization
Credit utilization is the ratio of the total amount of credit used over the total amount of credit given.
It accounts for 30% of your FICO credit score. (I will explain credit scoring in more detail in a later post.) I had 2 credit cards. A Bank of America Platnum Plus Visa Card with a $2600 credit line and a BankAmericard Cash Rewards Visa Signature Card that I obtained last year with a supposed credit line of $7000. I should have a credit line of $9600. I had been using my cards so that the highest combined charges on both cards in a billing cycle was $1132. My credit utilization ratio should have been $1132/$9600 = 11.79%

No Pre-set Spending Limit
What I discovered was that even though it said on my account that my credit limit is $7000, the BankAmericard Cash Rewards Visa Signature Card is actually a "no pre-set spening limit" card. Visa Signature advertises this as a benefit feature of the card. They claim that you have the "flexibility to exceed your credit limit should you ever need the additional purchasing power."

But if you take a closer look at it, this so called advantage can actually do harm. "No pres-set spending limit" gives the card issuer the power to approve each transaction on an individual basis. This means that the "limit" doesn't actually mean anything. There's a possibility that you can go over it and still get approved. At the same time, it gives the credit card company to micromanage your every transaction. It is really just a way to give consumers buying power that they don't have.

What Happens to My Credit Score?
Okay, back to the credit score, what does this mean to your score? Since the limit the card issuer set is meaningless, the credit line will either show up as $0 on your credit report or it'll go by the highest recorded balance, which is probably still lower than the stated "limit" if you use your cards responsibly. While I was never even close to  going over the "limit," my utilization percentage was still very high. Instead of 11.79% like we calcualted earlier, it was counted as $1132/$2600 = 43.53%

This wouldn't have been a problem if my combined credit line was much higher, which in turn lowers the utilization ratio. However, with a majority of my credit line based on the Visa Signature Card, it made a huge dent on my utilization. I filed a dispute with the credit agency immediately, but this procress can take up to 45 days. Additionally, I requested a credit line increase on the Platinum Plus Visa Card. Within a few days the credit line for that card went up to $6000 from $2600. Hopefully my credit score will go up from here. I'll make sure to follow up on the dispute.

I'm keeping the Visa Signature Card, though. Before, I applied for this card, I actually did quite a bit of research and I'm pretty satisfied with their reward benefits and services. I just wish I had known about this little "catch." So remember to do your research or even call the card issuer with questions when you're applying for a new card. Also, don't foreget to get your yearly free credit reports from all three credit agencies at


Post a Comment