Credit Scores and Credit Reports, by Evan Hendricks

Chapter 22

Outer Limits: Missing Limits

Just because you're paranoid, doesn't mean           
someone isn't out to get you!           

When it came to credit, Javiar Soler worked hard at being a "model consumer." In 1999, after attending Miami Dade College, he found himself saddled with nearly $5,500 in student loans. For the next few years, times were lean for the 27-year-old engineering student. The debt on his two Bank One credit cards climbed to nearly $9,000.

Determined to climb out of debt, Soler, in January 2004 set his own schedule for paying off his credit cards. He also signed up for Experian's Credit Expert program for monitoring his credit score and credit report. The big day came in August 2004 when he paid off the two Bank One cards. Around that time, Soler purchased about $90 worth of goods with his Capital One card, which he had used sparingly since he got it one year earlier. The Capital One card had a credit limit of $500. Soler's highest previous balance on the card was $151.

"I was so happy I did a happy little dance," Soler recalled.

By using the Credit Expert monitoring service to check his credit score at least twice a month, Soler watched his score gradually improve as he paid down his credit card debt over the first half of 2004. So with his two Bank One cards paid off, he enthusiastically went to check his credit score.

But Soler was flabbergasted to see that his credit score had dropped from 649 to 610 — meaning he went from "OK" credit to "sub-prime."

Then he noticed that while last month's $90 balance on his Capital One card was still on his Experian report, the $500 credit limit was not being reported. Instead, only the highest balance he'd ever carried, $151, was being reported as the "highest limit."

Soler was both mystified and annoyed. He understood that if Capital One correctly reported the $500 limit, his balance-to-limit ratio would be 18 percent, and would help his credit score. But with the $151 subbing as the credit limit, his "utilization ratio" had mushroomed to 60 percent and caused his credit score to plunge at a time when he expected it to go up.

"The missing Capital One credit limit was the only explanation," Soler said. "Nothing else had changed."

On his second attempt at calling Capital One, Soler said he spoke with "a very polite and helpful rep who informed me that Capital One's current policy is to NOT report credit limits, but that they are aware of the 'inconvenience' that it causes and are going to change their policy soon."

As of March 2005, there was no indication that Capital One would change its policies. Instead, there was growing evidence that more and more major credit card companies were gravitating towards Capital One's practice of not reporting credit limits.

When Soler learned Capital One's actions were intentional, he posted a long message on a Motley Fool discussion board, describing his experience and warning, "If you are applying for, or already have a credit card with Capital One, read on. You may be seriously getting screwed financially because of their unethical practices."³⁹¹

Soler's experience was not a fluke. In 2004, three staff economists at the Federal Reserve Board studied a nationally representative, random sample of 301,000 individuals' credit files, and found that nearly half — 46 percent — of the consumers had files where at least one credit limit had been withheld by a creditor.³⁹²

The balance-to-credit limit factor, known as the "credit utilization ratio," has a major impact on a credit score. It is part of "Factor 2" of the FICO scoring model, which accounts for 30 percent of the score (see Chapters 1 and 2).

For example, if you had a $2,400 balance against your $2,500 limit, you'd have a very high (96 percent) utilization ratio, which would significantly lower your score for nearly being maxed out. On the other hand, your $250 balance against your $2,500 limit produces a low (10 percent) ratio -- and usually raises your score.

If there is no credit limit reported, then it becomes difficult, if not impossible, to properly calculate the ratio — usually to the detriment of the consumer's credit score.

Both Soler and the Federal Reserve Board researchers learned that when credit limits were not reported, most scoring systems "substitute the consumer's highest balance ever for the missing credit limit." This is because Equifax, Experian and Trans Union keep track of the highest balance in a separate field on the credit report.

Soler figured out that he could improve his score by "maxing out" his Capital One card and then paying it off immediately. To do this, he deposited a promotional "convenience" check that Cap One had sent him, and then promptly used the money to pay off his balance.

³⁹¹ Soler's post resulted in a 90-message thread; http://boards.fool.com/Message.asp?mid=21221367
³⁹² Robert B. Avery, Paul S. Calem, and Glenn B. Canner, "Credit Report Accuracy and Access To Credit;" Federal Reserve Bulletin (Summer 2004)

Of course, most people have no idea that this is how the system works.

Richard LeFebvre, a pioneer in re-scoring and owner of the AAA American Credit Bureau Inc. in Flagstaff, Ariz., said one young couple — whom he would not identify by name — came to him to try to improve their credit score to qualify for a Fannie Mae mortgage with a three percent down payment.

"They were about 11 points short of what they needed to qualify," LeFebvre told the American Banker, an industry trade journal.³⁹³ The couple had a $2,500 limit on their Capital One card, but it had not been reported to the three credit bureaus, Equifax, Experian, and TransUnion. Instead, only the couple's high balance of $113 appeared on their credit report.

"Just that one credit card made the FICO model think that the card was maxed out," Mr. LeFebvre said. "We got Capital One to report their credit limit and we moved them 31 or 32 points up by correcting that one issue." The 2004 Federal Reserve study's finding that 46 percent of the consumers' files were missing at least one credit limit indicated the problem had worsened for consumers.

A 2002 Federal Reserve Board review found that credit card limits were missing from 13 percent of accounts examined; in 1999, 33 percent of the revolving accounts lacked credit limits, the Fed found.

Internal industry research from a source that asked not to be named, found that while some credit card issuers consistently reported credit limits, several major issuers often did not.

³⁹³ Michele Heller, "FCRA Hearing To Shine Spotlight On Credit Process;" American Banker, June 12, 2003

The research indicated that Capital One was the worst offender. Based on a sampling of at least 150 credit reports from Equifax, Experian and Trans Union from 2002-2004, the review showed that the credit limit was missing from 100 percent of the 453 Capital One accounts that were identified.

Although some consumers were shocked to learn of this practice, it was no big surprise to industry insiders. After all, in 2003, company spokeswoman Diana Don told the American Banker, "Capital One has never reported credit limits, for proprietary reasons ...We feel that it is part of our business strategy and provides competitive advantage."³⁹⁴

American Express did not report credit limits in a majority of cases between 2002-2003, the research found. Specifically, in those two years, it did not report limits to Equifax and Experian in about 80 percent of the cases, and did not report to Trans Union about 65 percent of the time. (Some types of American Express cards don't have credit limits like other revolving accounts.) In 2004, Amex credit limits were missing from 28 percent of the Trans Union accounts and 38 percent of the Experian accounts. But they were absent from 91 percent of the Equifax accounts, the research found.

Another offender was Citibank, although there were important differences among its subsidiaries. The credit card giant was found to report limits for its gas cards and for its CitiFinancial personal finance subsidiary.

"CITI does not report credit limits in its Citibank NA and Citibank South Dakota NA subsidiaries, but almost always does for its other subsidiaries," researchers wrote.

The statistics for Citibank underscores how difficult it is for consumers to "know the score." These numbers reflect the percentage of cases that Citibank did not report credit limits.

³⁹⁴ Id.

Missing Citi Credit Limits³⁹⁵

	Trans Union	Experian	Equifax
2002	24%	39%	30%
2003	22%	44%	75%
2004	16%	42%	66%

Calling CITI

This author noticed on all three of his credit reports that credit limits were not being reported for his Citi AAdvantage MasterCard (American Airlines mileage card), even though the credit limit was $7,440.

When told of this, a very polite Citi customer service representative said she did not understand how this could be, since "all credit cards have credit limits and they're always reported to the (credit) bureaus." She suggested that the omission might be a simple mistake by the credit bureaus. But I informed her that some credit card companies intentionally do not report credit limits. She admitted that she did not know her company's policy, but referred me to Citi's "Credit Bureau Dispute Unit," P.O. Box 6241, Sioux Falls, S.D., 57117. She said that I needed to include the credit report with a dispute letter that identified the account number in question. She said the dispute unit did not take phone calls.

(By the way, if you were to include your credit report as part of a dispute to Citi or another creditor, remember to black out all of your other tradelines and inquiries. Although creditors might like to have that information, they certainly are not entitled to it.)

³⁹⁵ Based on review of 357 Citi tradelines by researchers who asked to remain anonymous

Household & Discover

Household Bank's pattern was somewhat similar to Citibank's, according to the researchers.

Missing Household Credit Limits³⁹⁶

	Trans Union	Experian	Equifax
2002	22%	42%	72%
2003	50%	31%	88%
2004	23%	21%	87%

Over the same three-year period, Discover tradelines were missing credit limits on Experian reports less than 20 percent of the time. For Trans Union reports, 36 percent of Discover tradelines lacked credit limits in 2002, while 15 percent lacked them in 2004, according to the researchers.

However, in Equifax reports, Discover tradelines were missing credit limits 100 percent of the time.

Equifax & Credit Limits

The higher incidence of missing credit limits in Equifax reports can be explained at least in part by the fact Equifax requires creditors to fill in an extra box in order to report a credit limit, researchers said. Specifically, creditors must fill in the "AZ" narrative field in order to instruct Equifax that the amount in the H/C (High Credit) column is a credit limit, they explained.

If it is true, as this preliminary data suggests, that Equifax credit reports more often lack credit limits, then the question arises as to whether credit scores for consumers' Equifax reports are generally lower than those from other bureaus.

³⁹⁶ Based on a review of 270 Household tradelines by researchers who asked to remain anonymous

Back To Basics: The Dispute

"Jamie" really wanted to buy a new Volkswagen. But his 680 credit score was not good enough to qualify him for the 0% interest rate that made the deal affordable to him. He sought help from Veracity Credit Consultants, a Denver firm specializing in credit report issues (see Chapter 11).

Jamie's case illustrated how even when there are no late payments on a credit report, the credit score can be significantly lowered by credit utilization factors.

Veracity discovered that Jamie had three basic problems. First, his report showed a Citi credit card account with a $4,000 balance. Jamie said he didn't even have a Citi credit card.

Second, because Capital One was not reporting Jamie's $3,000 credit limit, his credit report showed him maxed out at $400. Third, his First USA Mileage Plus card's $10,000 limit was missing from his credit report, making him look maxed out at the $1,000 balance.

Thus, Jamie was showing 100% usage of a reported $5,400 limit.

Veracity's J. Madison Ayer said its disputes resulted in the removal of the mysterious Citi account from Jamie's report, and the reporting of accurate credit limits for both the Capital One and First USA accounts. Jamie's credit score went from 680 to 740. He got the Volkswagen at 0%.

Ayer said that Veracity was regularly finding missing credit limits on its clients' credit reports. But it also said it was regularly having success in restoring accurate credit limits by disputing their absence with the CRAs and credit card companies.

"Once we dispute it, we're not getting much resistance from the credit card companies," Ayer said. "The credit limits are usually restored."

Ann Schleifley was not as lucky. After signing up for a credit monitoring service, the Seattle-area resident noticed that her FICO score seemed lower than it should have been. Why? Her monitoring service advised her she was using over 50% of her available credit.

Then Schleifley saw why. Neither Capital One nor Discover were reporting her credit limits. She tried disputing with all three parties by mail and by phone.

"It was the most ridiculous run-around I'd ever seen," Schleifley recalled. "Capital One would blame Equifax; Equifax would blame Capital One and Discover. It went on for months. It was very frustrating. I just wanted it fixed!"

Schleifley finally contacted the Washington State Attorney General's office. She said she was fortunate enough to find two experienced consumer attorneys who, in April 2004, filed a federal lawsuit in Seattle, charging that Capital One, Discover and Equifax failed their reinvestigation duties under the Fair Credit Reporting Act. The case was pending when this book went to print.³⁹⁷

What's A Consumer To Do?

Wouldn't it be nice if there were a ready and dependable list of credit card companies that always reported credit limits? Unfortunately, that might not be possible. It's a fast-changing situation, and it appeared to be changing for the worse by the beginning of 2005.

For example, the researchers who identified those companies that were not reporting limits wrote, "If you want your credit limit reported, it seems best to get a card from MBNA, Chase, Bank One, First USA, Providian or Sears." They quickly added, "Even they have some missing credit limits on Equifax, but they seem very good about reporting credit limits to the other two bureaus."

³⁹⁷ Schleifley was represented by Christopher Green of Seattle, and O. Randolph Bragg, of Horwitz & Associates, Chicago.

Other sources provided this author with anecdotes about missing credit limits from MBNA, Bank One, First USA and Sears credit report tradelines (though it was not clear if this was due to the Equifax factor cited above).

One fear, of course, is that competitive pressures will mount, prompting more and more credit card companies to follow the path of the highly successful Capital One. On the other hand, why would an educated consumer use a credit card that has a greater likelihood of lowering their credit score?

Why Don't They Report Credit Limits?

The common reason given for credit card companies not reporting credit limits is to make their customers look less attractive to competitors who might try to solicit them with pre-approved credit card offers. But no credit card company official has actually said that this was the reason. One of Capital One's only public comments was the one to the American Banker cited earlier, where Diana Don said, "Capital One has never reported credit limits, for proprietary reasons ...We feel that it is part of our business strategy and provides competitive advantage."³⁹⁸

But what does that mean, exactly?

Your Limits, Our Trade Secrets

On the Motley Fool discussion board, a participant who described herself as a Capital One employee, said her company was not trying to lower its customers' credit scores.

³⁹⁸ Id.

"The policy is not designed to screw customers, but to protect our credit policy from competitors. Yes, we have had many debates over whether or not this is necessary, and that is probably why the rep mentioned that the policy might change, but I promise we are not out to get you," said the participant, who went by the screen name "DBAVelvet74."³⁹⁹

In other words, reporting credit limits would enable Cap One's competitors to figure out its standards, or underwriting criteria, for granting credit.

Capital One essentially confirmed this in Dec. 2004 when it told the Washington Post's Kenneth Harney "it did not report any customers' limits because "we consider [limits] proprietary" information, and "because we do not think it would be appropriate to impact the individual's Fair Isaac score, positively or negatively, by reporting them."⁴⁰⁰

It was not clear how Capital One's practices could positively impact its customers' credit scores. But Capital One declined to discuss the issue with this author.

Follow The Money

The practice of not reporting credit limits must be viewed within the context of other industry trends. After a rash of bankruptcy filings hurt profits in the mid-to-late 1990's, credit card companies gravitated towards "universal default" as an industry standard. Under universal default, any late payment — to a phone or utility bill or another credit card — or just carrying too much debt, was justification for credit card companies to raise cardholders' interest rates.

Of course, this was possible because companies could conduct monthly "account reviews" of cardholders' credit reports and, more importantly, their credit scores. These policies were spelled out in the' fine print of credit card agreements.

³⁹⁹ "DBAVelvet74" did not respond to e-mail requests, so it was never confirmed that she/he actually worked for Capital One.
⁴⁰⁰ Kenneth Harney, "Credit Card Limits Often Unreported," Washington Post, December 25, 2004

In its in-depth article on Universal Default, the New York Times, told the story of Steve Strachan, a flower importer in York, Penn. Strachan nearly always used his U.S. Bancorp WorldPerks Visa card for business travel to Europe in order to accumulate rewards in Northwest Airline's frequent-flier program. As a good customer, his credit limit was raised to $54,000 at a low interest rate. Despite heavy usage, he said he "never paid a penny of interest" because he paid it off each month.

But when the economy wilted in 2000, Strachan started using other credit cards. Although still paying on time, and maintaining a FICO score above 730, he was unable to pay off all of his balances every month.

It wasn't long before US Bank advised that it was raising the rate on his WorldPerks Visa card to 20.21 percent, nearly quadrupling the existing rate of 5.25 percent.

"I wasn't late, and I didn't go over the credit limit, and I didn't write bad checks," Mr. Strachan told the Times. A representative of US Bank told him he was using too much of his available credit, he said. (A US Bank spokesman declined to comment, the Times reported.)

John Gould, a former MasterCard International executive who conducts research for TowerGroup said it was "absurd" that 44 percent of credit card companies tell their customers that they might be penalized for one or two late payments with maximum rates that now exceed 28 percent.

The Nilson Report, a consumer payments newsletter, estimated that three out of four customers do something that violates the cardholder agreement and lose a favorable balance transfer rate, according to a 2003 article in the Dallas Morning News.⁴⁰¹

Louis Freeh, MBNA general counsel, defended these practices in a statement to the New York Times: "If we see indications that a customer is taking on too much debt, has missed or is late on payments to other creditors, or is otherwise mishandling their personal finances, it is not unreasonable to determine that this behavior is an increased risk. In the interest of all of our customers, we must protect the portfolio by adjusting a customer's rate to compensate for that increased risk."

⁴⁰¹ Anuradha Rahunathan, "Bait and Snitch?" Dallas Morning News, Aug. 8, 2003

Bottom Line: 'Rate Optimization'

Of the estimated 144 million cardholders in the U.S., 85 million Americans are considered "revolvers," meaning they don't pay their balances off every month. These are the most profitable customers. If they start at a low interest "teaser" rate, but are taken to a double-digit rate and they continue to pay, they are that much more profitable.

Some call it "rate optimization." It has helped card issuers reach record pre-tax profits, like $2.5 billion in 2003.

Increasingly, card issuers are finding the justification for raising rates in the credit report. If it's not a missed payment with another creditor, it's rising balances with other issuers.

According to Consumer Action's Linda Sherry, who conducted the group's 2004 survey on credit cards, 44% of the card issuing banks surveyed used credit report data to identify so-called risky cardholders and raise their interest rates, even if they never made a late payment. The 2003 survey found 39% of banks had universal default policies.⁴⁰²

The banks in the 2004 survey with universal default policies included Citibank, MBNA, Bank One/First USA, Chase Manhattan, Fleet, Wells Fargo, HSBC (Household), Providian, Discover Bank and Juniper Bank.

Those that did not raise interest rates solely because of credit report data included American Express, Bank of America, California Bank & Trust, State Farm and BB&T, according to the survey.

⁴⁰² Consumer Action, "2004 Credit Card Survey," www.consumer-action.org/English/CANews/2004_May_CreditCard/#Topic_01

The survey found that Capital One also did not practice universal default, Sherry said.

But it still appears to use credit reports. For example, a 2004 Cap One promo boldly offered "2.99% fixed APR FOR LIFE."

In the fine print on the back of the offer, the offer stated, "All your APRs may increase to a rate up to the default APR (24.9%) if you default under this Card Agreement ... because you fail to make a payment to us when due, you exceed your credit line or your payment is returned for any reason... Factors considered in determining your default rate may include your general credit profile, existence, seriousness and timing of the defaults under any Card Agreement that you have with us, and other indication of the account usage and performance."

Thus, under Capital One's stated policy, it's only after you miss a payment with them or exceed your limit that your credit report could be used to determine how much higher your interest rate goes. Capital One is free to change its policy.

Self-Fulfilling Prophecy

There is something troubling about card issuers not reporting credit limits, and then using credit reports as a justification for hiking their customers' interest rates.

After all, by not reporting credit limits, those issuers could very well be lowering their customers' credit scores. To then turn around and base an interest rate hike on a manipulated credit score seems like a subversion of the system — at least as it is portrayed by the financial services industry. And, if a primary goal of issuers is "rate optimization," there is a real danger that such practices will become more common.

Advocates warn that missing credit limits are patently unfair, and represent a ticking time bomb for unsuspecting consumers — and the system as a whole.

"We need legislation to guarantee completeness by all furnishers. We're not asking that furnishers be required to report, but if they do report they should be subject to accuracy and completeness standards," U.S. PIRG's Ed Mierzwinski told the American Banker in 2003.⁴⁰³

In its September 24, 2004 comments to the Federal Reserve Board, the National Association of Mortgage Brokers strongly endorsed a requirement for the complete reporting of "the high credit limit (not the highest credit used or some arbitrary number)."

"Furnishers of credit should be required to report complete information on each account, as many of the current practices today can be devastating to a consumer's credit score," the NAMB wrote.⁴⁰⁴

Providian

One company that chose the high road on this issue was Providian Financial, a top-ten credit card issuer based in San Francisco. In addition to fully reporting credit limits, Providian, in an unprecedented move in March 2004, began offering its cardholders free access to their Trans Union FICO score. Cardholders must register at the company Web site to start accessing their FICO scores. The program, dubbed "Providian Real Information," also permits cardholders to use a score simulator so they could see how much their score would change with certain behaviors, like paying down balances or late payments. They could also sign up to receive e-mail alerts if their credit score changed by more than 10 points.

⁴⁰³ Heller, op. cit.
⁴⁰⁴ Letter, NAMB President Bob Armbruster to Jennifer Johnson, Secretary, Federal Reserve Bd., Sept. 24, 2004. NAMB also endorsed full factual accurate information about the date an account was opened and date of last activity.

Providian officials said there had been tremendous customer response to the service.

Providian gained prominence by targeting the more risky sub-prime market. In years past, it had to settle several lawsuits over unwarranted late fees and other anti-consumer practices.

The FICO service is part of the company's pro-consumer makeover. "After listening to mainstream Americans across the country, we found some major gaps between how consumers say they want to be treated by their credit card company, and how they are actually being treated," said Warren Wilcox, Providian's vice chairman of planning and marketing.

It was also a shrewd use of resources. Like other credit card companies, Providian regularly purchased its cardholders' FICO scores from Trans Union when it conducts monthly "account reviews." Under the program, Providian could leverage that expense into a customer benefit.

The Ball's In Your Court

Absent some renewed interest in the issue, it is unlikely that Congress or federal oversight authorities will propose measures to protect consumers from the scourge of missing credit limits.

Like so many other aspects of the system, the burden generally remains on consumers, first to become educated as to how the system works, and then to take the appropriate corrective actions.

Continue to Next Chapter  

© 2005 Evan Hendricks and Privacy Times, Inc. All rights reserved.