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Unlimited credit can hurt your score
Credit bureaus use limits to establish scores
It might seem like a great and powerful idea to have a credit card with no limit. With no limit, you can do anything you want. Or can you? There are times when having no limit on the amount you can borrow can actually hinder your credit score. Watch out for this little-known problem.
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Unlimited credit could bring unlimited headaches
For the young and/or inexperienced, the issue of credit is the classic “Catch 22” situation. You must first have credit in order to acquire credit. For people with a short or limited financial history, this can be a problem. When you apply for a loan or an account, the lender first runs a credit check in order to see what your financial history looks like. That history, in the form of a report, will include a copy of your credit score. That score represents, in a nutshell, how worthy you are of receiving a loan.
Various things can negatively affect your score - a bankruptcy, previously unpaid bills, or financial judgments come to mind. Another thing that can create a problem is a lack of a credit limit. Some cards, such as the American Express card, come with no preset spending limit, unlike a Visa card, for instance, which has a set limit which you cannot exceed.
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One of the things that determines your credit score is the amount of available credit you have available to you. Not only is the amount important, but the ratio of the amount to how much of it you are using is important, too. If you have a $2000 limit and you have a $1900 balance, it appears that you are “maxed out” and you will not be all that likely to receive more loans in the future. On the other hand, if your limit is $5000 and you currently have a $75 balance, lenders and the credit bureaus will look upon you more favorably.
With a “no limit” card, the credit bureaus have no limit to use as a reference in regard to how much of your available limit you are using. With no such figure available, the bureaus usually use a substitute figure. Often, that figure is your outstanding balance. If your balance is $250, that will be treated as your limit and your score calculated accordingly.
How can you work around this problem? There are basically two different solutions:
- Try to obtain a card with a limit before you get a card without one. It’s best to have a limit available to you for the reasons described above.
- If you have no other choice, you can always buy something very expensive on your no-limit card, provided that you pay it back right away. If you do that, your recent large balance will be treated as your limit. A big screen television costing several thousand dollars would be a good example of something that would help.
Obviously, spending several thousand dollars in order to make it possible to get another card or loan is impractical for a lot of people. That is why you should always be careful to plan your applications for loans carefully. It also helps to make a regular check of your credit report and score.
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