Class action lawsuit against credit bureaus thrown out

07.14.09
By John Ulzheimer

Last week, a U.S District Court Judge in South Carolina dismissed a class action lawsuit against the three national credit reporting agencies. The lawsuit alleged that the bureaus had violated the Fair Credit Reporting Act by reporting Capital One credit card accounts without a credit limit and thus causing consumers’ credit scores to be artificially lower.  The plaintiffs claimed that the bureaus had not maintained reasonable procedures for ensuring maximum possible accuracy. The defendants claimed, and the court agreed, that the class could not prove that they had been harmed by the practice.

The issue with credit limits continues to be a white-hot topic considering the number of consumers who have seen their credit limits lowered over the past 24 months. The issue at hand in the lawsuit, commonly referred to as “Harris” -- the lead plaintiff for the class -- is not terribly different from the issues that consumers are facing today with credit limit reductions. A missing credit limit can cause your FICO scores to be lower than they rightfully should be. In turn, this can cause you to be treated less favorably by the various industries that use FICO scoring to make decisions.

Here’s how it works; A consumer has a credit card with a pre-assigned credit limit of $10,000 and a current balance of $2,500. The “utilization” of that credit card is 25 percent because the balance divided by the limit equals 25 percent. This percentage, and an aggregate version of the same, is extremely meaningful to your FICO credit scores. The higher the utilization percentage, the lower your score can be. Conversely, the lower your utilization percentage, the higher your score can be.  

If the credit limit is not being reported, most credit scoring systems will take the “highest reported balance” in place of the missing credit limit. And, in many cases, the highest reported balance is not as high as your true credit limit. The obvious exception is someone who has maxed out his or her card or has actually been allowed to charge over his or her assigned credit limit. In those cases the highest reported balance is going to be equal to or more than the assigned limit.  

The damage to the consumer’s scores can occur when the “high balance” is not as high as the assigned limit and magnifies as the divergence between those two figures increases.

For example, if the consumer referenced above had charged $5,000 as his highest balance ever, this is captured and reported by the credit bureaus and used by credit scoring models in lieu of the actual credit limit -- if it is missing. In this case, instead of having a 25 percent utilization rate, the consumer appears to be utilizing 50 percent.  Another more damaging example would be if the consumer had charged $2,750 as his highest balance ever. In this case, the consumer would be viewed, and scored, as if he were utilizing 91 percent.

The good news is that Capital One started to report credit limits in 2007. The bad news is that there are still credit card issuers who do not report credit limits for all of their cardholder accounts. In these cases, consumers can still see their credit scores artificially lower because of the high balance replacement. In order to determine if you are getting proper recognition for your actual credit limits, check all three of your credit reports to ensure that they are properly reported.
 
 

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