Lawsuit Alleges Major Credit Bureaus Adversely Influence Consumer Scores By Withholding Data

In recently-filed lawsuits, a trio of major credit bureaus have been accused of shielding data, allowing Capital One to withhold credit limits on its customers’ card accounts, which can reflect badly on credit score calculations. This is a case with potentially wide-ranging significance for Florida home loan applicants.

Class-action lawsuits against the three national credit bureaus, charging that they allow a practice that lowers millions of individuals’ credit scores, writes syndicated real estate columnist Kenneth Harney.

The lower scores then raise the mortgage rates and fees that are quoted by lenders during the application phase. Sometimes the higher rates lead to monthly payments that are hundreds higher than they should be.

With the current South Florida housing market, that could make all the difference between squeezing your way into a home or being priced out altogether.

The lawsuits charge that, under the federal Fair Credit Reporting Act, the national bureaus — Equifax, Experian and TransUnion — are required to follow “reasonable procedures to assume maximum possible accuracy of information in consumer [credit] reports.”

Nonetheless, plaintiff William A. Harris Sr. alleges that all three bureaus allow Capital One, a venerable credit card giant, to withhold the credit limits on its customers’ accounts — knowing full well that such omissions frequently lower consumer credit scores.

While not the only firm that declines to report credit limits, Capital One is the biggest and best known. It is the fourth-largest issuer of Visa and MasterCards in the U.S. and has 49 million customers. Capital One declined comment on the suit but has acknowledged its policy in the past.

Industry experts say companies withhold limits as a way to discourage raids on their customer lists by competitors, who have access to national credit files. Cardholders with bad credit scores may be less desirable to creditors sifting through national bureau data in search of prospective candidates.

The lawsuits shed fresh light on a controversial practice that may be more commonplace than many consumers know. When Federal Reserve researchers examined 310,000 individual credit files two years ago, they found 46 percent of all consumers were missing at least one credit limit.

Consumers who are new to the marketplace or have relatively few cards or other credit accounts are generally hurt the most. That’s because the FICO credit score — the most widely used in the field — favorably weights a consumer’s “utilization” of available credit. The higher the credit usage relative to the limit, the lower the score.

For instance, say you have a credit card with a $5,000 limit:

• The highest monthly balance you’ve ever had on the card was $2,500, giving you a moderate, 50 percent utilization ratio.
• This would leave you in good shape, but, if your card company withholds reporting your limit, the scoring software may substitute your highest balance in place of your actual limit in order to compute your ratio.
• Therefore, if your most recent balance on the card was $2,000, this could appear to be very high usage of credit when your substitute limit is just $2,500 — not the actual $5,000.
• In turn, you appear to have a high utilization ratio of 80 percent and your credit score could be depressed significantly, the National Credit Reporting Association states.

A 20- or 50-point decrease in your credit score could mean a one percentage point difference in the Florida home loan rate you are quoted, according to MyFico.com. On a $216,000 fixed-rate, 30-year mortgage as of last week, an applicant with a 660 FICO credit score would typically be quoted a rate of 7.07 percent, or $1,447 a month in principal and interest.

An applicant with a 610 FICO score, meanwhile, would be quoted a rate of 8.05 percent, with a payment of $1,592 — a substantial $145 bump.

The lawsuits allege that Capital One’s policy has an adverse impact on consumers, making it appear as if a great many customers have used up more available credit than is actually the case, thereby lowering their credit scores. Because Equifax, Experian and TransUnion know the negative effects of this policy, the bureaus have repeatedly and deliberately violated the law by not requiring Capital One to report all card members’ limits.

Federal law does require the credit bureaus to strive to be accurate, and the suit argues that Equifax, Experian and TransUnion are not complying.