Capital One policy change a help to borrowers
By Kenneth Harney
Article Launched: 08/02/2007 07:05:19 PM PDT


WASHINGTON - A major credit card company is ending a longstanding, controversial practice that critics say raised many of its customers' borrowing costs when they applied for home mortgages and equity loans.

Capital One Financial, based in McLean, Va., says it will now report all cardholders' credit limits to the three national credit bureaus - a step that could boost the FICO credit scores of some of its 50 million card customers by 40 to 80 points or more within a few months.

Higher FICO scores, in turn, will allow Capital One cardholders to qualify for lower mortgage interest rates when they buy or refinance homes. An increase of just 41 FICO points - from 659 to 700 - would cut an applicant's mortgage rate quote last week from 7.68 percent to 6.59 percent on a 30-year fixed-rate mortgage of $300,000, according to Fair Isaac Corp., the developer of the widely used scoring system.

Monthly interest and principal payments would drop from $2,135 with a 659 score to $1,914 with a 700 score. That $221 decrease would save the home buyer $2,652 the first year alone - and tens of thousands of dollars over the term of the mortgage.

In part because of its huge presence, Capital One has come under intense criticism by consumer and lending industry groups for withholding its customers' credit limits in its regular reports to Equifax, Experian and TransUnion, the three national credit data bureaus.

Why all the fuss? Though most consumers are unaware of it, their credit scores can be artificially depressed if creditors do not report their maximum credit limits. That's because Fair Isaac assigns a heavy weight - 30 percent of a person's score - to what is known as "utilization" of available credit. 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, living close to the financial edge, and more likely to fall behind on payments.
On the other hand, say you're carrying a $500 balance on that same card, or a 10 percent utilization rate. The FICO system rewards you with extra points because of your moderate and responsible use of your available credit.

When a creditor withholds or neglects to report your limit, the FICO software cannot compute a utilization ratio.

Over the years, Capital One has brushed off criticism that it was needlessly harming millions of its customers by withholding their account limits from the credit bureaus. Equally bad, said some consumer groups, Capital One never disclosed this practice to its customers.

A Capital One spokeswoman, Tatiana Stead, told me July 27 that the company made the decision to report credit limits because "like any policy that our customers may have concerns about, we constantly re-evaluate our practices." The change, already under way, is expected to be completed by the end of this year, she added.

Lending and consumer group reactions to the policy switch were grudgingly positive. "It's about time they stopped hurting their own customers," said Ginny Ferguson, a credit scoring expert for the National Association of Mortgage Brokers. "They've known all along that (their policy) depressed FICO scores."