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Potential Hits to Your Credit and What You Can do About it

Cards that don't report credit limits are just one of the hidden threats to your credit score. Here are some of the potential hits you might be taking, and how you can fight back.

Some credit issuers refuse to report their customers' credit limits to the three major credit bureaus. So, instead, the bureaus use the highest balance a customer has charged as a proxy for the limit. As a result, the customers' all-important "debt utilization ratios" -- the portion of their available credit these borrowers are actually using -- can appear artificially high. That can depress a borrower’s credit scores. Lower credit scores can mean higher interest rates on mortgages, car loans and other borrowing since many insurers also use credit-scoring systems to help gauge risk.

Two basic types of issuers tend not to report limits: Companies that offer cards with no preset spending limit and companies that have a corporate policy to keep the information secret. Not reporting the limits can prevent competitors from spotting a company's more creditworthy customers, since those tend to be the ones with higher limits. As a proxy for the credit limit, card issuers may report the highest recent balance, the highest balance ever or some other number of its choosing. You're most likely to be hurt by a missing or inaccurate credit limit if you haven't had credit for very long, you have a troubled credit history or the cards with missing limits are the only ones you have. You can check which number your lenders are using by viewing copies of your credit reports. By federal law, you can get one copy free annually from each bureau; the site to use is www.annualcreditreport.com.

If your limits aren't being reported accurately, you have a few options:

  • Fight. Ask your issuer to report your correct limit, or to at least use a more favorable number. They may be willing to substitute your actual limit or your highest balance charged for the lower number it's been reporting.
  • Switch. Use cards that properly report your limits to the credit bureaus.

Scorecards
The FICO scoring system groups people with similar histories together when rating them. These groups are called "scorecards." If you have a bankruptcy on your report, for example, you'll be grouped on a scorecard with other bankrupts. Your credit habits may look pretty good compared with theirs, but if the bankruptcy were to disappear from your record you'd be lumped in with people who have stronger histories. Your credit behavior might not look so good compared with this new group. There's not much you can do about this quirk in the scoring formula, other than brace for the potential effect.

Balance Transfers
Lower interest rates are generally better when you're trying to pay off debt, but taking advantage of a balance-transfer offer can affect your credit scores in a number of ways. Opening a new credit card to take advantage of the offer can ding your scores by 5 points or so. If you're transferring your balance to a card with a lower limit, that also can hurt your scores, as can consolidating debt. The FICO formula typically would rather see $1,000 balances on five cards than a $5,000 balance on one card. You can compound the damage by closing the old card, since shutting down the account trims the amount of available credit that's used in the credit-scoring formula. Typically, lenders won't tell you the credit limit on a new card until after you've applied and agreed to transfer the balance. If you're planning to take advantage of a balance transfer offer, read all the fine print and consider the following:

  • Limit the number of new accounts you open. If you want to improve your credit scores, don't keep bouncing your balances from card to card.
  • Pay down your debt. Use the lower rate as an opportunity to reduce your debt load. Paying off debt is good for your wallet and good for your credit scores.

Settling Debts
In the latest versions of the FICO formula, score creator fair Isaac Corp. fixed a glitch that often penalized folks for paying old debts that had been charged off and sent to collection agencies. But you can still do substantial damage to your scores if you settle a current debt for less than you owe. If an account hasn't been charged off and you're dealing with the original creditor, Fair Isaac officials say, a settlement can be worse than leaving the account open and unpaid. Of course, leaving an account unpaid will eventually result in a charge-off and a referral to a collection agency, which isn't good for your scores, either. There's no easy solution if you haven't got the money to pay your bills. Filing bankruptcy is an option, although it's likely to have a far more devastating effect on your credit than a settled account or two. You also might investigate a debt repayment plan through a legitimate credit-counseling agency.

 
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