After mentioning earlier this week that Capital One has been arbitrarily raising rates on their credit card customers, it’s only fair to report on one of their positive moves. But first, a bit of background….
Capital One has previously not reported credit limits to the credit bureaus, providing them instead with information only on actual balances. I know what you’re thinking — who cares? I pay my credit cards on time so my credit score is just fine, thank you. Well, you actually should care…
This is a decidedly bad thing for consumers in that credit utilization is an important component of your FICO credit score and, in the absence of information on credit limits, the scoring system will substitute your highest balance in place of your credit limit.
As a simple example, let’s assume that you have a credit card with a $1000 limit and a $450 balance. That works out to a utilization of 45% ($450/$1000 * 100%). However, if you card issuer doesn’t report the limit, and if your previous high balance was $500, then your utilization will appear to be much higher at 90% (i.e., $450/$500 * 100%). This higher utilization makes it look like you’re close to the end of your rope, such that you’re perceived as a bigger risk, causing your credit score to drop. Since utilization accounts for 30% of your credit score, and since your credit score influences the interest rates that you are eligible for, this can be turn out to be rather expensive.
So… I was pleased to read that Capital One recently stopped this ridiculous practice, and is now reporting credit limits. According to an article in the Seattle Times, this change of heart will boost the FICO scores of some of their 50 million customers by as much as 40 to 80 points.