It is the well-kept little secret of the credit-card industry, and it can be exceptionally costly to homebuyers and mortgage applicants. Your credit-card company may be depressing...
It is the well-kept little secret of the credit-card industry, and it can be exceptionally costly to homebuyers and mortgage applicants.
Your credit-card company may be depressing your credit scores behind your back by not reporting your credit limit to the three national credit bureaus. Lower credit scores, in turn, push you into higher interest rates when you apply for a mortgage and can add thousands of dollars of extra costs for you as a homeowner.
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If you carry a Capital One credit card, you can be 100 percent certain that your credit limit is never reported because Capital One confirmed that its corporate policy is to withhold limits, whether it depresses some customers’ scores or not.
If you have other cards in your wallet, you’ll need to check your credit files to determine whether your limits are reported. Although most major bank-card issuers say they report customers’ credit limits monthly, researchers say that limits frequently are missing in the bureaus’ files. In fact, a recent Federal Reserve Board study that analyzed 301,000 consumer credit files found that 46 percent were missing at least one credit limit on their national reports.
The problem of unreported credit limits is most severe for younger home buyers, newcomers to the banking and credit arenas, and others with relatively thin credit histories, said Terry W. Clemans, executive director of the National Credit Reporting Association.
The reason, Clemans says, is that the most widely used scoring system in the mortgage field — the FICO score developed by Fair Isaac & Co. — assigns 30 percent of a person’s score to what is known as utilization of available credit. Utilization boils down to this: If you’ve got a card with a $1,000 limit and you are carrying a $950 balance, you’ve got a 95 percent utilization rate. FICO’s scoring system subtracts points for such high ratios.
On the other hand, if you’re revolving a $250 balance on the same card, you are rewarded with points because of your apparent moderate, responsible use of your available credit.
What happens if your credit-card company withholds or fails to report your credit limit? The scoring system typically substitutes your highest reported balance on the card for your missing limit. That, in turn, will often depress your score by raising your utilization rate.
Say your card has a $5,000 limit but the highest balance you’ve ever racked up was $1,000. That should add points to your score, as befits a modest 20 percent utilization rate. But if your card company hasn’t reported your limit, the scoring system will treat your high balance of $1,000 as a proxy for your actual limit.
But what if you regularly carry an $800 or $900 balance on that card? Suddenly your utilization looks scarily high, and your score plunges — especially if that card is one of the few big credit accounts in your national bureau files. Depending upon your overall credit profile, you could lose 20 to 50 points, or even more, because of that missing credit limit.
What does a 20-point to 50-point drop in your FICO score do when you apply for a home loan? Fair Isaac’s Web site, MyFico.com, gives an example: In mid-December an applicant for a $150,000 30-year fixed-rate mortgage with a FICO score of 700 would be quoted a 5.79 percent interest rate, costing $880 a month in principal and interest.
An applicant with a FICO score of 660 would be quoted a 7.48 percent rate, with monthly principal and interest payments of $1,047. That extra $167 a month would raise loan costs $2,004 a year and would be a needless, unfair expense to the home buyer if it were caused by a card company’s failure to report a customer’s credit limit.
Why would a card issuer do such a thing? McLean, Va.-based Capital One Financial Corp., one of the largest issuers in the country, heavily markets its cards to young consumers and individuals with imperfect or thin credit histories.
It says it does not report any customers’ limits because “we consider [limits] proprietary” information, and “because we do not think it would be appropriate to impact the individual’s Fair Isaac score — positively or negatively — by reporting them.”
Fair Isaac itself, by contrast, supports full reporting of account information. Fair Isaac Vice President Cheri St. John says “the more data the better” — positive or negative — when it comes to fairness in FICO scoring.
Kenneth R. Harney: KenHarney@earthlink.net