Credit

Can Picking The Wrong Credit Card Lower Your Credit Scores?

When you’re applying for plastic, likely the last thing on your mind is what kind of impact your choice of card will have on your credit scores.  The problem is that every month I get multiple emails from consumers asking that very question: “How is this credit card affecting my credit scores?”  Here’s the one I got late last week: “I have a credit card that doesn’t report my credit limit to the credit bureaus. I have heard that this can lower my score. Is this true and if so, what can I do about it?”

This consumer’s question and concern are valid.  The practice of withholding credit limits from your credit reports CAN lead to a lower credit score for the cardholder.  In fact, up until a few years ago, Capital One didn’t report credit limits to the credit bureaus for any of their millions of cardholders - and many other card issuers followed their lead.  And then…the lawsuit.

In September and October of 2007, a consumer named William Harris filed class action lawsuits against all three of the national credit reporting agencies: Equifax, Experian and TransUnion.  The lawsuits, which were eventually dismissed, accused the credit bureaus of not maintaining reasonable procedures that would ensure the maximum possible accuracy of credit reports by allowing Capital One to withhold credit limits from their credit reporting.  Capital One began reporting credit limits soon after the lawsuits were filed and today the practice of withholding credit limits is rare, but not extinct.

The issue is that when you’ve got a card that doesn’t report credit limits,  the absence  impacts your “debt to limit” percentage ( ametric used in calculating your credit score), also called “revolving utilization.”  If you’re not familiar with this percentage, I’d suggest reading this article on the topic that I wrote earlier this year.  Here’s the truth about the issue:

How Missing Credit Limits Impact Your Credit Score

A missing credit limit can result in one of three things happening to your credit scores: the score can go up, go down, or remain the same.  If you have a credit card with a missing credit limit, then the FICO score will use your highest historical balance (called “high balance” on a credit report) in lieu of your actual credit limit when calculating your utilization percentage. If your highest historical balance is at - or close to your credit limit - then it’s a wash, and your score won’t be negatively impacted.

If, however, your highest balance is very low relative to your credit limit, then yes, it’s very possible the missing credit limit is negatively impcting your score.  Finally, if you’ve actually managed to charge OVER your limit, then your highest balance is actually higher than your credit limit and the practice could actually be helping your scores.

So, how do you know if you’ve got a credit card that’s not reporting the credit limit?  The fastest and most accurate way of determining this is by claiming one of your free credit reports from http://www.annualcreditreport.com/, where you’ll see a list of your credit cards as reported by your issuers. If the limits are missing from any of your credit card accounts, then you’ll know who does (or doesn’t) report limits.

How to Handle Missing Credit Limits

If you do find out that one of your credit card issuers isn’t reporting credit limits, then you can certainly ask them to do so.  But, keep in mind that they don’t have to comply with your request, as there is no law requiring them to report credit limits.  You can also certainly move your business to a newly opened credit card - one that does report credit limits - if you like.  This involves applying for, being approved and activating the new card.

Keep in mind, though, that opening a new card isn’t a benign event vis-à-vis your credit scores. You’ve applied, which means there’s going to be a new inquiry on one of your reports. And, the new account is going to probably end up on all three of your credit reports, which could lower your scores because of how it impacts the average age of your credit accounts (a higher average account age positively impacts your score).  The net effect will likely work in your favor, so don’t be scared of moving your business if you’re not happy with your credit card issuer.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.