It’s Christmas in July—courtesy of Capital One!Terry W. Clemanscredit, credit repair, Capital One, credit limits, consumer credit, FICO
If Capital One is a card in your wallet, chances are your credit
score just improvedcompliments of the credit card company with the
unique (and I personally think very clever) marketing campaigns. In
late July, Capital One announced it was ending a long-standing
corporate policy to not disclose their cardholders credit limits to
the three national credit reporting agencies. This policy has
undoubtedly caused many consumers to be overcharged for credit and
potentially denied credit due to the fact that the credit scoring
methodologies look at the relationship of the amount of credit in
use versus the total credit available as the second most important
element of a consumers credit profile when calculating credit
scores.
This relationship is known as credit utilization, and when
calculating credit scores, it is second in importance only to
whether or not you actually repay your bills on time. The FICO
score, developed by Fair Isaac Corporation, weighs 30 percent of a
person's total score to the utilization of available credit and
applies it based on the percentage of credit in use. For example,
if you have a $10,000 limit on your credit card and you are
carrying a $9,000 balance, you have a 90 percent utilization rate.
FICO's system will deduct points from that 30 percent allocated for
high utilization rates. To obtain the maximum points from the
utilization ratio, percentages of use should be below 50 percent of
available credit. This is a similar ratio to what is used by other
credit scoring models that have emulated the FICO approach to
credit scoring.
Any consumer that has a Capital One card and a thin credit file
will most certainly be helped by this new policy. By thin file, I
am referring to a consumer who has a limited credit history that
contains less than three credit cards, one of which is Capital One.
Since the thinner file consumers have less total credit available
to them (lets say a combined total of $25,000 for this example),
when Capital One reported no credit limit, the scoring software
would look at the highest historical balance for a limit. If a
$15,000 Capital One credit limit was replaced by a $5,000 highest
balance, which is the common practice when the credit limit is
missing, and calculated against a current balance of $4,000, the
consumers credit score was greatly harmed by Capital Ones practice
of withholding the credit limit. That thin file consumers
utilization ratio was impacted by the missing $10,000 of available
credit much greater than a consumer with a thick file and $100,000
or more of available credit.
This practice of Capital One has been controversial for so long
that Wikipedia, the free Internet encyclopedia, lists the practice
under the title of Controversy in the company profile for Capital
One Financial Corporation. This withholding of data was previously
defended by Capital One in litigation, during congressional
hearings, to consumer groups and in many articles on the subject in
publications nationwide. In one litigation, all three national
credit repositories and FICO were sued for violation of the Fair
Credit Reporting Act for allowing this practice. When challenged by
Congress in a hearing on consumer credit and credit card practices,
Capital One reminded the legislators that the United States credit
reporting system is voluntary, and that they could withhold
reporting completely if they wanted. Capital One further claimed
they specifically had the right to withhold the credit limit as it
was proprietary corporate information and disclosing a consumers
credit limit would allow Capital Ones competitors insight into
their formulas for calculating a consumers credit worthiness.
The Capital One Web site is not providing any reason for the
reversal in policy and calls to them for an interview were
unanswered at press time. Score this change of policy as a major
victory to the cardholders of one of the largest credit card
issuers in the nation. To all Capital One customers, now that your
actual credit limits are being reported, your credit score will no
longer be artificially lower due to their policies.
Terry W. Clemans is the executive director of the National Credit Reporting Association
Inc. He may be reached at (630) 539-1525 or e-mail
[email protected].
