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Cards that don't report credit limits are just one of the hidden threats to
your credit score. Here are some of potential hits you might be taking, and
how you can fight back.
By Liz Pulliam Weston
Accountant John Johnson of Springdale, Ark., painstakingly rebuilt his
credit after some business reversals several years ago. But the credit-card
issuer that initially helped him is now standing in his way.
Capital One refuses to report its customers' credit limits to the three
major credit bureaus. Instead, the bureaus use the highest balance a
customer has charged as a proxy for the limit.
As a result, the customers' all-important "debt utilization ratios" -- the
portion of their available credit these borrowers are actually using -- can
appear artificially high. That can depress borrowers' credit scores, the
three-digit numbers lenders use to help determine creditworthiness.
Lower credit scores can mean higher interest rates on mortgages, car loans
and other borrowing, as well as potentially higher insurance premiums, since
many insurers also use credit-scoring systems to help gauge risk.
Hidden threats
Making on-time payments to Capital One cards over the years has helped
Johnson rebuild his credit scores, but he says its policy on credit limits
is hurting him now. Capital One's practice makes Johnson appear to be using
more than 60% of his credit limit, when in fact he's using less than 40%. He
tried disputing the issue with the credit bureaus, to no avail.
"I got pretty hostile after awhile," Johnson admits. "I just don't
understand why they (Capital One) would do that."
Cards that don't report credit limits are just one of the hidden threats to
your credit. Here's what you need to know about some of the potential hits
you might be taking, and how you can fight back:
Missing limits
Two basic types of issuers tend not to report limits: Companies that offer
cards with no preset spending limit, like American Express, and companies,
including Capital One, that have a corporate policy to keep the information
secret. Not reporting the limits can prevent competitors from spotting a
company's more creditworthy customers, since those tend to be the ones with
higher limits. (A South Carolina consumer, by the way, has filed lawsuits
against the three credit bureaus alleging this practice violates federal
fair credit reporting laws.)
As a proxy for the credit limit, card issuers may report the highest recent
balance, the highest balance ever or some other number of its choosing.
You're most likely to be hurt by a missing or inaccurate credit limit if you
haven't had credit for very long, you have a troubled credit history or the
cards with missing limits are the only ones you have.
You can check which number your lenders are using by viewing copies of your
credit reports. By federal law, you can get one copy free annually from each
bureau; the site to use is www.annualcreditreport.com.
If your limits aren't being reported accurately, you have a few options:
Fight. Ask your issuer to report your correct limit, or to at least use a
more favorable number. You're not likely to get Capital One to change its
policy, but another lender may be willing to substitute your actual limit or
your highest balance charged for the lower number it's been reporting.
Reset. If your lender reports the highest balance charged, you can reset the
number reported to the bureaus by running up a big balance one month. Just
make sure you can pay this hefty number off in full when the bill comes to
avoid unnecessary finance charges. And don't do this when you're in the
market for a loan, since you could sustain some short-term damage to your
credit scores.
Switch. Use cards that properly report your limits to the credit bureaus.
Switching scorecards
The FICO scoring system groups people with similar histories together when
rating them. These groups are called "scorecards." If you have a bankruptcy
on your report, for example, you'll be grouped on a scorecard with other
bankrupts. Your credit habits may look pretty good compared with theirs, but
if the bankruptcy were to disappear from your record you'd be lumped in with
people who have stronger histories. Your credit behavior might not look so
good compared with this new group.
That's apparently what happened to Carmen Georgescu, who had $51,000 of
credit-card debt and a 710 FICO score. After paying off $17,000 of debt in a
few months, her score rose to 726. A few weeks later, though, her score
suddenly plunged to 686.
Such abrupt drops can often be traced to a negative item, like a delinquency
or a bankruptcy, disappearing from a borrower's credit report. In this case,
though, the change was even more subtle. Let's let a Fair Isaac expert
explain it:
"Carmen had opened a new account last year which, at that time, put her in a
different scoring group consisting of consumers who had newly opened
accounts on their credit files," explained Barry Paperno, manager of
customer service for Fair Isaac. "Then when this recently opened account had
aged enough to take her out of this scoring group and put her into one with
consumers who had not opened any accounts recently, her score dropped."
Carmen's still-heavy debt load hurt her worse with this new group than it
had with her previous scorecard group.
There's not much you can do about this weird quirk in the scoring formula,
other than brace for the potential effect. The good news: If Carmen keeps
paying down her debt, she should see a pretty quick resuscitation of her
score, Paperno said, "as long as she holds off on opening anything new for
awhile."
Balance transfers
Lower interest rates are generally better when you're trying to pay off
debt, but taking advantage of a balance-transfer offer can wallop your
credit scores in a number of ways.
Just opening a new credit card to take advantage of the offer can ding your
scores by 5 points or so. If you're transferring your balance to a card with
a lower limit, that also can hurt your scores, as can consolidating debt.
The FICO formula typically would rather see $1,000 balances on five cards
than a $5,000 balance on one card.
You can compound the damage by closing the old card, since shutting down the
account trims the amount of available credit that's used in the
credit-scoring formula.
Typically, lenders won't tell you the credit limit on a new card until after
you've applied and agreed to transfer the balance. If you're planning to
take advantage of a balance transfer offer, read all the fine print and
consider the following:
Limit the number of new accounts you open. If you want to improve your
credit scores, don't keep bouncing your balances from card to card.
Pay down your debt. Use the lower rate as an opportunity to reduce your debt
load. Paying off debt is good for your wallet and good for your credit
scores.
Settling debts
In the latest versions of the FICO formula, score creator Fair Isaac Corp.
fixed a glitch that often penalized folks for paying old debts that had been
charged off and sent to collection agencies. (See "When paying old bills can
hurt your credit.")
But you can still do substantial damage to your scores if you settle a
current debt for less than you owe. If an account hasn't been charged off
and you're dealing with the original creditor, Fair Isaac officials say, a
settlement can be worse than leaving the account open and unpaid. Of course,
leaving an account unpaid will eventually result in a charge-off and a
referral to a collection agency, which isn't good for your scores, either.
There's no easy solution if you haven't got the money to pay your bills.
Filing bankruptcy is an option, although it's likely to have a far more
devastating effect on your credit than a settled account or two. You also
might investigate a debt repayment plan through a legitimate
credit-counseling agency (read "The consumers' guide to credit counseling"
first).
Traffic tickets and library fines
I wrote about this issue in "New threats to your credit score," and the
trend has gained momentum since then. Local governments are determined to
recoup some of the $40 billion in unpaid debts consumers owe, including
unpaid library fines, parking tickets and traffic penalties. So these
governments increasingly turn to private collection agencies, which
typically report the unpaid amounts to the credit bureaus as part of their
efforts to pressure consumers into paying the fines. The collectors may add
late fees or other charges that increase the balance.
The bottom line:
Pay your fines promptly. Don't wait for follow-up notices, since they can
easily go astray. Many libraries allow you to review your library record,
including unpaid fines, online, while municipalities typically have a Web
site or a phone number allowing you to check for traffic or parking fines.
Don't let a dispute fall through the cracks. If you're disputing a traffic
or parking ticket, note the applicable deadlines on your calendar and make
sure the issue has been resolved.
Don't move away from a problem. If you plan to move and believe you may have
unpaid fines, contact the relevant municipality or library and make sure
you've squared your account with them. Don't expect a government agency to
spend much energy tracking you down; it's much easier to turn a delinquent
account over to a collection agency, and once that's happened, your credit
is at risk.



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