New research by the Federal Reserve Board should set off alarm bells for anyone considering applying for a home mortgage: Behind your back, your credit card company could be hurting your credit standing by withholding key information from the national credit bureaus.
That could depress your credit scores and raise the interest rate on your home loan.
Three Federal Reserve staff economists studied a nationally representative, random sample of 301,000 credit files, and found that nearly half -- 46 percent -- of the consumers had files in which at least one credit limit had been withheld by a creditor.
Why is that significant? Say you finished school a couple of years ago, you have a good job and you're beginning to establish a solid credit history. You have one credit card with a $2,500 limit on it. You run a modest monthly balance averaging $250. You have never been late, never missed a payment. You're an excellent customer.
But unknown to you, your card issuer has a policy of not reporting fully the details about its customers' accounts. In your online national credit file, your monthly balances and payments are reported accurately. But your credit limit is left blank.
Why would your card issuer do that? To stymie competitors who routinely troll through the databases of the credit bureaus for possible customers by ordering lists of consumers with specific characteristics.
For example, a competing card issuer might look for people who live is a particular Zip code who have credit scores above a given threshold. The company might also seek consumers with young-looking "thin files," with just a few existing credit lines.
Here's the problem: One of the heavily weighted factors in most credit scores, whether the Fair Isaac Corp. (FICO) score or the credit bureaus' proprietary scores, is "utilization" of existing credit. If you are making heavy use of the credit accounts you already have, you are considered a greater risk of future default. Your scores go down.
To measure utilization, scoring systems look at the ratio of your highest balance to your credit limit. If you had a $2,400 high balance against your $2,500 limit, you would have a very high (96 percent) utilization ratio. The scoring program would penalize you for being nearly maxed out.
On the other hand, your $250 balance against your $2,500 limit produces a low 10 percent ratio -- and the scoring system should reward you for your prudent use of credit.
Now for the score killer: When a creditor reports no credit limit on an account, calculation of a utilization ratio is impossible. According to Federal Reserve researchers, when confronted with missing credit limits, most credit scoring systems "substitute the highest balance for the missing credit limit."
"The typical result," said the Fed, is higher credit utilization ratios "than if the credit limits had been reported." Artificially inflated ratios, in turn, typically depress credit scores, sometimes by 50 points or more, according to credit industry experts. The effect can be even more pronounced when the loan applicant is young or relatively new to credit.
The Fed researchers did not identify the credit card issuers who intentionally withhold customers' limits. But for 46 percent of the consumers in a random sample of 301,000 credit files to be affected by this score-depressing policy, the creditors involved must be numerous, big, or both.
Consumer advocates are outraged at the practice. "I think they are basically intentionally harming their own customers," said Evan Hendricks, author of "Credit Scores & Credit Reports," and editor of the newsletter Privacy Times.
Edmund Mierzwinski, consumer program director of the U.S. Public Interest Research Group, said "credit card companies wouldn't be incompletely reporting [credit limits] if they didn't think it deflated their customers' scores" -- and rendered cardholders less attractive to competitors.
How much can non-reporting of limits cost you on a mortgage? Potentially, hundreds of dollars a month and thousands of dollars a year. According to Fair Isaac, a 677 FICO score in today's market would qualify a borrower for a 6.23 percent 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 percent. Monthly principal and interest to the applicant with the artificially depressed score would be $115 a month higher than it should be.
How to battle non-reporting in a voluntary credit system? Easy. Ask your credit card issuers whether they report credit limits. Or get a copy of your credit file online (typical cost is about $9.95), and check whether your limits are all there.
Then cancel all the cards that intentionally depress your credit scores.
Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.