Credit card issuer's omission can be costly to homebuyer

Nation's Housing

December 26, 2004|By KENNETH HARNEY

IT IS THE well-kept little secret of the credit card industry, and it can be exceptionally costly to homebuyers and mortgage applicants.

The secret is this: 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 push you into higher interest rates when you apply for a mortgage and can add thousands of dollars of needless extra costs for you as a homeowner.

If you carry a Capital One credit card, you can be 100 percent certain that your credit limit is never reported. Capital One confirmed to me that its corporate policy is to withhold limits, even though it might depress some customers' scores.

If you have other cards in your wallet, you'll need to check your credit files to determine whether your limits are reported. Though most major credit card issuers say their policy is to report customers' credit limits monthly, researchers say limits frequently are missing in the bureaus' files.

A recent Federal Reserve Board study that analyzed 301,000 consumer credit files found that 46 percent of consumers in the sample were missing at least one credit limit on their national reports.

The problem of unreported credit limits is most severe, according to credit industry experts, for younger homebuyers, newcomers to the banking and credit arenas, and others with relatively thin credit histories.

"There is no doubt that [non-reporting of limits] has a major negative impact on consumers with thin files," 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 "utilization" of available credit. Utilization boils down to this: If you have a card with a $1,000 limit and you are carrying a $950 balance, you have a 95 percent utilization rate. FICO's scoring system subtracts points for such high ratios.

If you're revolving a $250 balance on the same card, you are rewarded with points because of your apparently moderate, responsible use of your available credit.

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 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 ratio. 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.

If you regularly carry an $800 or $900 balance on that card, your utilization suddenly 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 on your overall credit profile, you could lose 20 to 50 points, or more, because of that missing credit limit.

A 20-point to 50-point drop in your FICO score can have a significant effect when you apply for a home loan. According to Fair Isaac's Web site, MyFico.com, in mid-December an applicant for a $150,000 30-year fixed-rate mortgage with a 700 FICO score 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 $167 extra a month would raise loan costs $2,004 a year and would be a needless, unfair expense to the homebuyer if it was caused by a card company's failure to report a customer's credit limit.

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 supports full reporting of account information.

Ken Harney's e-mail address is KenHarney@earthlink.net.

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