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The Trouble With Nearsighted Lenders

My wife and I are currently looking at moving, so I thought it would be a good idea to get our credit scores to know what to expect in terms of interest rates on a new mortgage. Mine checked out fine. Her FICO score (Fair Isaac (NYSE: FIC  ) ) was a little lower than expected, however.

The primary knock against her, according to the commentary on her Equifax (NYSE: EFX  ) report, is that her ratio of outstanding debt to available credit is too high. That struck me as odd, considering that her outstanding balances really aren't "outstanding" since we pay them off in full each month. I dug a little deeper and realized that the two cards that we use pretty much like an ATM in order to get the mileage and cash-back benefits were reporting $0 as the credit limit. (The limits on the two cards are ridiculous -- around $30,000 combined.)

I called both the lenders and was told by each that it's their policy not to report those limits to bureaus and that I couldn't get them to do so. Sounds fishy! Any idea as to what they're up to with that policy? Thanks for your time. J, Dallas, TX

Great questions, so let's tackle them one by one:

1. Why is my wife getting knocked for having a high debt-to-available credit ratio?

Lenders are very nearsighted. They see only what's right in front of them at that very moment. So even if you are the most responsible bill payer in the world, using your credit cards to earn miles or cash back, paying them off in full every month, and enclosing a handwritten thank-you note to Visa, your lender doesn't know what you plan to do in the future. What if you lost your job and decided to pay only the minimum one month, or skip out on the bill altogether?

When it comes to checking your credit, timing is everything. One factor that can affect your score is when during the credit cycle your score is calculated. If you just paid your bill and your credit card balance is very low, then your "debt to available credit" ratio is going to be low, thus giving your score a boost. But if it's not yet bill-paying day and you have a large balance on the card, that information inputted into the formula makes it appear that you have a higher ratio of debt to available credit.

2. Why aren't my lenders reporting our credit limit?

Here's why: They want to keep you all to themselves. These non-reporting institutions don't want their competitors in on a good thing -- you, a responsible customer.

On your credit record you probably saw a bunch of institutions under "credit inquiries." These are entities that are sizing you up -- wanting to know whether you are a good candidate for their credit card/bank loan/refinancing package/unmarried son.

To keep competitors with sweet credit card deals from poaching clients, some lenders do not report credit limits. The only thing they'll cop to is having a business relationship with you. They're hoping that the competition will just glance at your file and go on, not having enough information to see that you're a live one.

In your wife's case, this missing piece of information could be harming her overall credit score. All you can do is ask your lender to report the missing credit limits. But as you discovered, it's often company policy not to. For others, it can be a helpful omission. If most of your credit or charge cards have very low limits and those limits are not reported, a consumer may actually look better in the eyes of a potential lender.

More credit-scoring shenanigans:

And here's how you can check your score for cheap.

Dayana Yochimowns no company mentioned in this article.


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