Primary marketMissing Credit Card Limits Can Cost Homebuyers
New home buyers -- especially younger, first-time purchasers -- are the unwitting victims of a little-known practice by some credit card companies: Withholding of their credit limits in reports to the three national credit bureaus.
That"s the conclusion of new research into the practice by independent credit agencies and credit software firms.
"There is no question that home buyers with "thin" credit files (containing only small number of accounts) get badly hurt when their major card issuer does not report their account limits," says Terry Clemans, executive director of the National Credit Reporting Association. "I mean big potential increases in their mortgage costs" because of depressed credit scores.
David Chung, president of CreditExpert, Inc., a scoring software technology firm based in Towson, MD, said declines of 40 or 50 FICO score points are not uncommon for younger consumers with just one or two affected card accounts. Even middle-aged homebuyers with substantial credit histories can lose 25 or 30 points or more when their major card issuer withholds their account limits in its reports to Equifax, Experian and TransUnion, the national bureaus.
In one recent case documented by researchers at Chung"s firm, a young Baltimore area woman lost 66 points off her FICO score, pushing up her mortgage borrowing costs by nearly $9,000 during the first five years of a $225,000 fixed-rate 30-year home loan. The reason: Even though the woman had a $4,000 limit and a perfect payment record on her sole credit card, the card company withheld her account limit information from the bureaus. As a result, the FICO scoring system used by most mortgage lenders to price home loans could not give her the points she deserved for her solid credit card record. That, in turn, raised her mortgage interest costs substantially.
In another recent case documented by CreditExpert researchers, a 40-year-old Columbus, OH man lost 43 points when two of his card issuers failed to report his limits.
Which card companies fail to report account limits, and why? Beginning with the latter question first, credit industry executives say card issuers sometimes hide their best customers" identities from potential poaching competitors by lowering their FICO scores or cloaking their account maximums. Card companies routinely troll through the vast databases of the national credit bureaus looking for names and credit profiles as targets for new card offers.
Capital One Financial, which confirms that it withholds all customer account limits in all reports to the bureaus, says it does so for another reason: Privacy. Capital One spokeswoman Diana Don said the firm sees credit limits as "proprietary" information -- one of the "terms and conditions" of an account that should be kept sealed.
Asked whether Capital One was aware that by withholding limits, it potentially depressed some customers" FICO (Fair Isaac) scores, Don said: "We do not think it would be appropriate to impact (an) individual"s Fair Isaac score -- positively or negatively -- by reporting (limits.)"
Ms. Don added: "Because we are not privy to Fair Isaac"s proprietary scoring algorithms, we do not know how an individual"s scores would be impacted" by withholding reporting of limits.
Another large card issuer who does not report certain customers" limits is American Express. Although the company reports limits on its revolving-balance cards, such as Optima and Blue, it reports no limits on its familiar green, gold and platinum non-revolving cards. A spokeswoman for American Express said the non-revolving cards, which generally must be paid off in full each month, have "no pre-set limit," so no limit can be reported, whatever the impact on FICO scores might be.
Most other large card issuers, including Discover and HSBC, have corporate policies mandating full reporting of account details on credit card customers. But independent credit researchers, such as CreditExpert, say they routinely see credit files with account limits missing from a wide spectrum of card issuers. A recent study by the Federal Reserve Board confirms that impression. It found that 46 percent of all consumers in a random sample of 301,000 credit files had at least one credit limit missing or withheld.
Since any missing limits have the potential to hurt home buyers" abilities to obtain good interest rates on their mortgages, Realtors and other trusted advisors should urge clients to check their credit files well in advance of applying for a loan. Otherwise, they just might find themselves quoted a less-affordable "subprime" interest rate on their mortgage even though they deserve much better.