CardRatings.com's credit and debt management forum has had numerous postings concerning credit scores. But one very troubling string concerns an article published on January 2, 2005 by Kenneth Harney, a columnist for The Washington Post. The subject is summarized by the following, quoted from the article:

"Credit card companies may be depressing consumers' credit scores without their knowledge by not reporting credit limits to the three national credit bureaus. Lower credit scores, in turn, push borrowers into higher interest rates when they apply for a mortgage and can add thousands of dollars of needless extra costs for them as homeowners."

I approached two notable resources concerning the above passage and received two very pointed and informative, but differing responses:

• Gerri Detweiler, credit expert for Everyday Wealth, and author of The Ultimate Credit Handbook available through Ultimate Credit Solutions, Inc.
  
• Craig Watts, Public Affairs Manager for Fair Isaac Corp., the company that invented the FICO credit risk score that many lenders use.

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"FICO says about 30%... of the score is debt which includes utilization (how much of your available credit is actually being utilized). It can be a major factor. For a statistic, see the National Score Index where Experian quantifies it for their Experian Plus score."

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Craig replied:

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"FICO credit risk scores do assess credit utilization along with other data from credit reports when calculating a person’s score. Its part of a general category of “amounts owed” which accounts for roughly 30% of a person’s FICO score and results from the algorithm’s analysis of [other] information.... So it is an exaggeration to say that 1/3 of a FICO score is determined by revolving credit utilization alone. Its actual impact is less and will vary from individual to individual, based on what else is on their credit reports."

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Question: "This of course means that if I have a $5000 credit limit (on a credit card that is not reported to the credit bureaus) with a high balance of only $1000, that instead of reflecting only 20% utilization (a positive), my report reflects utilization of 100% (a negative). What can I do to improve my score?"

Gerri's response:

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"Consumers must protest this practice to FTC and OCC and until they complain enough, it will not change. I personally don't understand how they get away with it since the FCRA says you can dispute items that are inaccurate or INCOMPLETE. The credit reporting agencies or regulators should be clamping down on this practice."

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Craig replied:

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"Your assumption is incomplete. It’s true that if the credit limit field entry is missing but high balance is present, then the FICO algorithm will substitute high balance for credit limit when calculating credit utilization for that account. If the limit and high balance fields are both missing, that particular account would be bypassed when calculating revolving credit utilization. We’ve analyzed the overall impact upon FICO scores of missing credit limits and found that the impact on the score can be either an increase or decrease—it will vary depending on the consumer’s overall credit profile."

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Craig also added:

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"When Fair Isaac created the FICO score in the late 1980s, we evaluated over 300 characteristics from consumer credit reports and selected about two dozen that are most predictive of future credit performance. Credit utilization was one such predictive characteristic. To see the full list, go to MyFICO- What Is Your Score. We redevelop our FICO algorithm regularly – each time from scratch -- and every time credit utilization continues to be a strongly predictive characteristic.

To develop the FICO score we studied millions of credit reports, so we were aware even then that not all creditors report fully to the credit reporting agencies. To compensate, we built the FICO score so that it doesn’t rely too heavily on any one credit characteristic or area. This way, missing or inaccurate data in one area doesn’t hamper the algorithm’s ability to deliver a consistently predictive score. That said, our preference is always for all creditors to fully report positive and negative credit history information. We believe U.S. creditors in general are reporting more credit history information to the credit reporting agencies than they ever have before. Nearly all revolving credit card issuers do report credit limits today to the credit reporting agencies."

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While there is apparently conflicting information regarding whether this practice adversely affects all credit scores, I think it is safe to say that the practice does lower the credit scores of some consumers. The old adage "buyer beware" definitely applies here.

We welcome your comments about credit scoring and credit reports in our popular credit forum!