For people rebuilding credit after bankruptcy, every point counts, and it's important to manage credit wisely with a specific eye toward improving those scores.
Class action lawsuits filed in a South Carolina federal court allege that Capital One, one of the largest credit card issuers in the country, has been actively harming consumer credit-with the cooperation of the three major credit bureaus.
That's because Capital One refuses to report credit limits to the three major credit bureaus.
That means that the high balance on a credit account appears as the credit limit as well, creating the impression that the consumer has "maxed out" that credit card.
That's important from the perspective of credit grantors who actually look at a consumer's credit report, since it looks as if the consumer is stretched to the limit financially. However, most credit grantors rely primarily or exclusively on credit scores, and the Capital One practice directly harms those scores.
"Utilization" is an important factor in determining a consumer's credit score. Utilization simply means "how much of your available credit are you using?" Recent data from Experian revealed that those with the highest credit scores used only, on average, 17.8% of their available credit.
A Capital One cardholder with no other open accounts, a credit limit of $2000 and an outstanding balance of $300 would be below the average utilization of those whose credit scores fall above 720. However, if Capital One did not report the credit limit, and this $300 was the highest balance the consumer had ever carried on this account, he would appear to be at 100% utilization-a strong negative factor in determining credit scores.
The associated drop in scores might mean denial of credit, but it might also mean that consumers using Capital One credit cards are paying higher interest rates for their other credit accounts.
The suits allege that the three major credit bureaus, TransUnion, Experian and Equifax, are aware of the negative impact on consumer credit, but nonetheless allow Capital One to withhold credit limits. Since credit reporting is voluntary, Capital One is under no legal obligation to provide credit limits. However, the law does require the credit bureaus themselves to strive for accuracy in reporting.
Capital One isn't the only company that engages in the practice of withholding credit limits when reporting, but it's the largest. The company also has a disproportionate impact on those who are recovering from bankruptcy or rebuilding credit after some other kind of financial difficulty, since Capital One is one of the leading issuers of secured, low-limit credit cards marketed as a means of helping consumers rebuild credit.
The lawsuit may well force the credit bureaus to find a more accurate way of handling Capital One accounts, if the company continues to refuse to report credit limits.
In the interim, however, consumers would be wise to add credit limit information to the list of items to monitor on their credit reports, and be cautious about using cards that do not accurately report credit limits.