There has been a lot of buzz around a new type of hybrid—not a car, but a card! Some lenders are increasing the issuance of revolving cards with no pre-set spending limit (NPSL). Also known as flexible spending accounts (FSA–not to be confused with a healthcare spending card), these hybrid cards combine the features of a typical credit card, where customers can revolve the balance or pay in full each month, with those of a charge card, where users can charge without a limit as long as they pay in full by the next billing date.
Much of the recent buzz has been fueled by a Card Hub study on NPSL cards. As the Philadelphia Inquirer noted, this study "raises as many questions as it answers.” Indeed, both lenders and consumers continue to ask us how the reporting and usage of this type of revolving card is factored into the FICO® Score. I'd like to use this blog post to clarify a few issues—and dispel some misconceptions.
The CDIA (Consumer Data Industry Association) issues guidelines that define how specific credit history information should be reported to the major credit reporting agencies. The guidelines encourage card issuers to report the revolving credit limit on NPSL cards, and FICO and the credit reporting agencies stand behind that recommendation. This will permit the revolving portion of the card to be factored into the utilization component of the FICO® Score. Utilization, of course, is the percentage of the card's outstanding balance compared to the card’s limit.
The Card Hub study, however, advocates that NPSL cards be excluded from credit utilization calculations to avoid a negative impact on a consumer’s score. We disagree, for two reasons:
- First, it is incorrect to assume that a NPSL card will automatically have a negative impact on a consumer’s FICO® Score. The specific impact of an NPSL card depends on the cardholder's credit profile. A highly utilized NPSL card could negatively impact the score, but there are instances where a score could also benefit from NPSL cards, such as the addition of lowly utilized NPSL and the credit history it supplies. Remember that the FICO Score is impacted by not just balances and utilization, but also payment history, length of credit history and other credit report factors.
- Secondly, statistical research shows that revolving credit utilization remains highly predictive of repayment risk. Consumers with relatively little usage of revolving credit accounts have better repayment risk than those who use a majority of their available credit. “Maxing out” on credit cards means consumers are at higher risk for defaulting on credit accounts in the future.
Some observers express concerns that the effect of utilization on the FICO® Score from NPSL cards could be exaggerated if consumers go well over the reported revolving limit, which could negatively impact the score. They argue that the risk associated with “overlimit” NPSL cards is not the same as with traditional revolving accounts that go overlimit. After careful analysis, FICO introduced an empirically derived approach to treating “overlimit” NPSL in the FICO® 8 Score; ultimately, an overlimit NPSL card is not as risky as an overlimit traditional credit card and FICO 8 accounts for that. Specifically, FICO 8 accounts for these nuances in credit risk by not over-penalizing consumers who are overlimit on their NPSL account.
When you talk to consumers worried about FICO® Score impact of NPSL cards, remind them that they can take proactive action. Keeping balances low on any revolving account, including an NPSL card, helps ensure positive impact on their FICO Score. And most importantly, consumers should pay bills and debts on time, since their repayment history on credit obligations is the biggest single factor in the FICO Score.