Your Credit Card Company is Playing Evil Tricks on You

I couldn't believe what I was seeing.

I recently reviewed my wife's FICO scores and I nearly fell out of my chair...they suggested she was carrying balances on her credit cards that were too high.

What?!

It couldn't be...she never carries a balance on her credit cards. I knew something was wrong, so I reviewed her credit reports to see what her credit card balances were.

There it was...two of her credit card lenders were reporting her "highest balances" as her credit limits. Highest balance is defined as: the highest balance you've ever had on that specific credit card.

The difference between "highest balance" and "credit limit"

You may be thinking, "What's the big deal? You're overreacting."

I'm not. You see, when lenders do not report your actual credit limits to the credit reporting agencies it can wreak havoc on your FICO credit scores.

For instance, let's say the issuer is Capital One® (Crap One, as I like to call them). They should report your account as follows:

Credit limit (your real limit): $5,000

Current balance owed: $1,000

You're using 20% of your available credit on this credit card. Ideally, it should be lower, but this is certainly not bad.

However, let's say that Capital One reports your highest balance as your credit limit. Assuming $1,000 is your highest balance ever, they may report the account like this:

Credit limit: $1,000

Balance owed: $1,000

Now it looks like you're using 100% of your available credit—which is not true. It's evil, because it will drastically lower your FICO credit scores. It's as if your son earned five A's and one C in his science class at school—but his final grade is a C because the teacher's policy is to use his lowest grade as the final grade.

Some lenders don't report credit limits at all

Some lenders refuse to report your credit limits.

Why's this bad? Because when there's nothing in the credit limit field on your credit reports, that account isn't helping your FICO scores as much as it could. If your credit cards aren't helping you increase your credit scores, they're useless to your recovery from bankruptcy.

Remember, how much you owe (your balances) versus how much you're approved for (your credit limits) makes up a large part of your FICO credit scores (see Life After Bankruptcy Issue #16). So if you have high credit limits and low credit usage, that's a good thing. It will help raise your scores.

How can credit card issuers get away with these dirty deeds?

Some lenders do this out of ignorance (unfortunately, they're in the minority). Most do it to gain a competitive advantage. Credit card issuers know that when they don't report your credit limit accurately it can screw up your credit scores. In fact, about 5 years ago a disturbing trend started taking place with the top 50 credit card issuers.

Two of the largest issuers stopped reporting credit limits to all three credit reporting agencies. Soon after, other large credit card issuers jumped on the bandwagon and withheld their customers' credit limits. After about six months it was more common to see a missing or manipulated credit limit than it was to see an accurate one.

It got so bad that Fair Isaac Corporation performed a quick analysis and determined that the practice of not reporting accurate credit limits hurts some consumers' FICO scores. Why in the world would credit card companies refuse to report real credit limits when they know it will hurt their customers' FICO scores?

In two words...monetary gain.

In 123 words...

The credit card issuers thought they were losing customers to their competitors. Here's an example...

Let's say I have a National City Bank® credit card with a $2,500 credit limit reporting on my credit reports. When a limit is reported on credit reports, all the other credit card companies can see it. If Capital One saw that my limit with National City Bank was $2,500, they could then offer me a $3,000 or $5,000 limit to entice me to switch cards.

Credit card issuers were stealing business from each other by making their credit limit offers a little better than what you already had. This is called "poaching." And the easiest way to prevent poaching was to not report their customers' credit limits.

Who cares if it hurts your FICO scores? The credit card companies sure didn't.

But I care. And I know that some credit card issuers still don't report any credit limit information at all. Capital One is the most notorious offender. (Surprised?) Others just report your highest credit balance as the credit limit.

So how can you determine if your FICO scores are being damaged?

1. Review your credit reports.

2. Look to see if your credit limits on your credit cards are being reported properly. If you're not sure, look at the last statements you received from each of your credit card issuers and write down what the limits should be.

3. If they're not listed on your statements, call the credit card issuers and ask them what your credit limits are. Then compare them to the limits showing on your credit reports. You may ask yourself, "How do I do that?"

If you find one of your lenders incorrectly reporting your credit limits, or not reporting anything, here's what to do:

1. Telephone the credit card companies and alert them of the problem and how it affects you. Ask them to start reporting the accurate credit limits. Remember, it takes 30 to 60 days for any change to post to your credit reports. So the sooner you take action the sooner you'll see results.

2. On the same day you telephone them, follow up with a written letter (via registered mail) to the person you spoke with on the telephone summarizing the problem in writing and outlining the plan of action they gave you over the phone. Be sure to date the letter and keep a copy.

3. If after 45 days you don't get a response...your next line of defense is to hire an attorney to represent you. Hopefully it won't come to this...but a threatening letter from an attorney can work wonders.

4. If the lender refuses to adjust their policy for you, then you have a decision to make. Will you take them to court? Or will you transfer your balance to a more reputable lender? I'm not a big proponent of transferring balances, but this would be a situation where you may have no other choice.

Here's my take on things...

The Fair Credit Reporting Act says that any accounts that are inaccurate, incomplete, misleading, unverifiable, or outdated have to be deleted or corrected—or it's a violation of federal law.

I would argue that an account with an inaccurately reported credit limit is not only inaccurate, but is also grossly misleading—especially to FICO credit scoring models. This is especially important for people recovering from bankruptcy—it's hard work to increase our credit scores and we need every FICO score point that we earn.

In summary: Make sure you know the reporting policies of all your current lenders, and any lenders you're thinking of applying with. You should use only lenders that are willing to give full credit for your good credit habits.

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