Capital One will start reporting cardholder credit limits to the three credit bureaus, a common practice from which most cardholders had no idea their creditor abstained. Credit limits help TransUnion, Experian and Equifax determine credit utilization, which accounts for 30% of a credit score. Capital One’s decision, which will take effect by the end of the year, will likely boost its cardholders’ credit scores. From the Washington Post:
Utilization basically boils down to this: If you’ve got a card with a $5,000 credit limit and you’re carrying a $4,750 balance, you’ve got a 95 percent utilization rate. FICO’s scoring system — which runs from 300 to about 850 — subtracts points for high ratios. The rationale is that people who are maxing out their cards are perceived as riskier and more likely to fall behind on payments.
On the other hand, say you’re carrying a $500 balance on that same card — a 10 percent utilization rate. The FICO system rewards you with extra points because of your moderate and responsible use of available credit.
When a creditor withholds or neglects to report your limit, the FICO software cannot compute a utilization ratio. Typically, it either doesn’t use that credit line to compute the score or substitutes your highest reported balance on the account for your actual limit.
The end of one secretive and harmful practice makes you wonder what else they might be hiding from their cardholders.