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It’s Christmas in July—courtesy of Capital One!

National Mortgage Professional
Mar 24, 2014

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].

Published
Mar 24, 2014