Primary marketFed Study Finds Many Credit Bureau Files Are Missing Key Information
What your credit card company isn"t telling the national credit bureaus could cost you big money when you go to buy a home.
That"s one of the key conclusions emerging from a new credit system study conducted by the Federal Reserve Board. Out of a representative national statistical sample of 301,000 consumer credit files, 46 percent of all individuals in the sample had at least one trade line in their files that lacked information about the maximum credit limits on their accounts.
Credit limits are important factors in computing credit scores. And credit scores in today"s marketplace govern what interest rate you are charged on a mortgage. In order to measure a person"s "utilization" of credit -- that is, how close the consumer is to "maxing out" on his or her available credit -- scoring systems need to know the credit limit on the account. Some large, national credit card companies routinely withhold their customers" account limits, effectively making computation of standard credit scores impossible on those consumers.
The card companies do this in order to keep the true creditworthiness of their customers out of the view of competitors who want to poach them with attractive offers. Card issuers, banks, and mortgage companies routinely scour the databases of the national credit bureaus for prospects, based on credit scores.
When credit card companies withhold credit limits in their monthly reports to the national credit bureaus, they do so knowing that FICO (Fair Isaac) and the bureaus" own proprietary score models will "impute" a credit limit for each customer, using the consumer"s "high balance" in place of the missing credit limit. Since the high balance is virtually always lower than the credit limit -- especially for a card company"s best customers -- their scores virtually always drop when the high balance is substituted for the actual credit limit.
To illustrate: Say you are a young prospective home buyer with a single credit card and just a few other credit accounts. Your card limit is $5,000. Being a prudent user of credit, however, the highest monthly balance you have ever run up on the card is $1,000. Your current balance is $800. When you apply for a mortgage to buy your first home, here"s what happens if your card issuer does not report your account limit: You"ve got a very high (80 percent) apparent utilization ratio on your card, since the scoring system substitutes the $1,000 high balance for your actual $5,000 credit limit ($800/$1,000.) Had your card issuer reported your true limit, your utilization ratio would have been a low 16 percent ($800/$5,000).
The net result: Your scores plummet. How far? Potentially 30 to 50 points, maybe more, according to credit experts, especially since your national credit file is "thin," with just a small number of trade line entries.
What impact could a decline of that magnitude have on the interest rate you pay on your mortgage? A large and costly impact. According to Fair Isaac & Co., for a home buyer who would have a 675 FICO score with all credit limits reported, a $150,000 30-year fixed-rate mortgage would come with an average rate in today"s market of 6.26 percent. A 50 point drop to a FICO score of 625 would push the rate to 7.41 percent, according to Fair Isaac -- $115 in principal and interest extra per month. That translates out to$1,380 a year, and nearly $7.000 in needless overpayments during the first five years of the mortgage.
Evan Hendricks, author of the new book Credit Scores and Credit Reports, says lenders and card companies who withhold limits are "intentionally harming their customers" by depressing their credit scores.
Brad Scriber, credit issues specialist for the Consumer Federation of America, says that "as long as (card companies) game the system by only reporting what they want to, consumers will not be assured that they are receiving fairly-priced credit."
Which card companies are involved? The Fed study did not identify them. But with nearly half of all consumers affected by the practice, it"s entirely possible that your credit scores -- or a client"s -- are being artificially depressed.
What to do? Tell card companies to cut it out and fully report all customer account data. Otherwise, cut up the cards of any card issuer that you find is intentionally withholding your credit account limits. Switch to companies that won"t cost you thousands extra when you apply for your next mortgage.