Is Your Credit Card Company Ruining Your Credit Score?

Here's some interesting news: the three biggest credit bureaus in the US, namely Equifax, Experian and Trans Union, are being sued for artificially deflating credit scores! How? Well, if you have a Capital One credit card, these agencies (that claim to be able to provide an "accurate" credit score) are not requiring Capital One to fully disclose on your credit account. At issue is the fact that Capital One does not provide your card's credit limit when they report on you.

No big deal you say? You'd be wrong. When a company like Capital One fails to report credit limits, the FICO scoring software uses your highest account balance to compute what is called a utilization ratio. A high utilization ratio means you are using a lot of credit, and it lowers your overall score. So, your credit card limit is very important; it helps show that you are using credit responsibly, and also shows where you are using less than you have access to. All this generally gives you a higher credit rating. However, when your highest balance is used to calculate your utilization, your utilization can look really high when it's actually low. In the end, your credit rating suffers even though you are doing everything right.

Here's an example: My wife and I share a credit card where we have a $18,000 limit. (No kidding. Every year they give us a higher limit! We can't believe how much trouble we could get into if we actually used our credit cards to their maximum amounts.) We generally use no more than $3000 worth of credit on any given month, depending on what's up. However, our maximum balance was about $4000 last year, when we had some unusual car expenses. Now, if our utilization went from about 15-20 percent (our real utilization), and suddenly became 75 percent, our credit score could be sent lower. In some cases, people's scores can be dropped as much as 50 points or more, which could be the difference between the best rate on your loan and a much higher one.

The real problem in this equation is the credit card company. What they are doing is trying to protect their customer base. After all, if it is public knowledge that you are a responsible user of a credit card with a high limit, other companies might just want to try to solicit your business. That's why they don't want to report. However, the real victim in this is you, the credit card holder, the next time you go to negotiate a good rate on a loan.


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