A couple of years ago, Federal Reserve researchers reviewed 310,000 individual consumer credit files. Among their findings: nearly half (46%) were missing at least one credit limit on their report.
For anyone who is concerned about improving or maintaining their credit score, this is bad news... because when companies like Capital One do not report credit limits to the credit reporting agencies (Equifax, Experian and TransUnion), your credit score can drop significantly.
The first question: How does this happen?
Part of your credit score -- 30% -- is determined by how you use your credit. If you tend to maintain balances at or close to your credit limit, your score will not be as high.
Credit reporting agencies use special software to calculate your credit utilization ratios. Credit utilization refers to how much of your available credit you are using. If a company does NOT report your card limit, the software may substitute your highest balance in place of your actual limit to calculate your ratio.
So, for example, if you have a credit card with a $5,000 credit limit, and the highest monthly balance you've ever had on the card is $2,500, you have a 50% utilization ratio. However, if your most recent balance is $2,000, and the credit card company doesn't report your $5,000 limit, the scoring software may use the highest monthly balance ($2,500) to determine your limit. That would make it appear as though you are nearly maxxed out with a credit utilization ratio of 80% - which could drop your score 20 to 50 points or more.
Recent data from Experian revealed that those with the highest credit scores used only, on average, 17.8% of their available credit.
The next question - Why do companies withhold credit limits?
The answer: Competition and the almighty dollar.
With the average American carrying four credit cards with balances of $9,000-$13,000, it's becoming increasingly difficult for lenders to gain new customers. As a result, they are trying to lure existing cardholders with offers of low balance transfers, cash rebates and more.
Companies like Capital One hope to reduce "poaching" of customers by their competitors, who routinely sift through national credit bureau data looking for prospective customers. The practice of withholding credit limits artificially lowers the credit scores of their customers, theoretically making them less attractive to other lenders. And it might mean that consumers using Capital One cards are paying higher interest rates on their other credit accounts. This makes it more likely that you will remain a captive customer of Capital One and less likely to be offered the credit you deserve from other companies.
Those hurt the most by this practice are consumers with few credit accounts and those just beginning to build their credit history.
Class action lawsuits have been initiated, accusing the Big Three of deliberately shielding data despite knowing that this practice reflects negatively on credit score calculations.
Until the lawsuit is settled, consumers would be wise to review their credit files to see which companies are not reporting accurate credit limit data, and to be cautious about using these cards.
