This is an excerpt from The Motley Fool newsletter that I receive entitled "Credit Card Companies Sabotaging Mortgages" Of course, folks here have long been aware of this practice, particularly by Cap 1, but I hope it's a good thing that the FRB is looking into it. Maybe we can figure out a way to get a message to the Fed to look into the industry as a whole, and the sham of "credit scoring." From TMF: Daily Q & A Unbeknownst to you, while you innocently trot your respectable credit score around to lenders as you shop for a mortgage or car loan, your credit card companies may be mucking things up. Here's what's going on: A study by the Federal Reserve Board has found that some credit card companies are failing to report your credit limit to the credit bureaus that maintain your credit history and credit score -- and missing credit limits can often affect the interest rates you're offered when you need to borrow money. Why would they do such a seemingly harmless thing? For competitive reasons. They don't want you to get "poached" by other credit card companies that routinely scan the system, looking for folks with certain characteristics. When your credit limit is omitted, your information is incomplete, and your score is lower than it otherwise would be, through no fault of your own. This is a big deal. The credit card companies engaging in this nasty practice are not serving their customers well -- in fact, they're potentially costing customers tens of thousands of dollars apiece. For this they're being paid? In a recent article, columnist Ken Harney offered some frightening details: "According to Fair Isaac, a 677 FICO score in today's market would qualify a borrower for a 6.23% 30-year fixed rate on a $150,000 home loan. A 30-point drop in that score because of non-reporting of credit limits would push the best rate available to 7.38%. Monthly principal and interest to the applicant with the artificially depressed score would be $115 a month higher than it should be." That's $1,380 per year in unnecessary payments -- ouch. Lest you think that you're probably safe and this is happening to just a few people, think again. The Fed's study looked at the credit files of more than 300,000 people -- and discovered withheld credit limits on fully 46% of them. Don't let yourself be a victim of this practice. Give your credit card companies a jingle, and ask whether they're withholding your credit limit(s) from credit bureaus. Better still, don't just take the word of the person who answers the phone -- get a copy of your credit report, and see for yourself how complete they are. Learn much more about your credit report and how to get a copy of it in our Credit Center.
I think there was a news item somewhere recently that even Sally Mae had withheld complete reporting of student loan information, also to interfere with competitors poaching "their" customers. The effect, of course, was to lower FICO scores of recent graduates with student loans, still establishing credit and possibly looking for their first home loan. With regard to, say, Cap One, does anyone know if borrowing (perhaps by BT) up near your credit limit, then paying off, to force the high balance to be reported even if the actual CL is not, results in FICO using the high balance in place of the absent CL? Even the CC companies who do not report a CL have an incentive to report current balance, to telegraph total debt to other potential creditors. This is another reason to diversify your credit relationships, just like you diversify your investments. Do not be dependent on any one company for anything, and realize they could merge or arbitrarily change their policies. Prune off relationships that no longer meet your requirements, but first establish competitive alternatives. Personally, I have had no problem with Cap One, and consider their no-hassle card one of my more useful cards primarily because their balance transfers and cash advances are both low fee and at reasonable interest rates. There is value in a line of credit with few constraints.
