Are you a victim of the credit scoring scam of the century? If you have a credit card, there’s a 50/50 chance that you are.
What Is the Credit Scoring Scam of the Century?
It works like this:
When sending credit card solicitations, credit card companies target specific people to receive their offers. Imagine that all of your credit cards have low interest rates and credit limits of at least $10,000. A credit card company would not offer you a credit card with a high interest rate and a $500 limit. After all, you would never apply for that credit card.
But a credit card company might offer you a credit card with a $15,000 limit and even lower interest rates. And you just might take advantage of this offer and switch cards.
Obviously, your existing credit card companies don’t want you to receive these offers because they might lose you as a customer.
And this is where the credit scoring scam of the century comes into play.
To create their marketing lists, credit card companies buy information about you from the credit bureaus. While the credit bureaus do not disclose your specific financial information, they do provide information about the credit cards you carry. For instance, Whatchamacallit Credit Card Company might buy a list of people who have credit cards limits of at least $5,000. Whatchamacallit could then send a credit card offer targeted to these people
And here is the credit scoring scam: Your existing credit cards can keep your name off these lists by reporting a lower credit card limit than you actually have, and this slaughters your credit score.
Let’s use the earlier scenario as an example. Whatchamacallit is looking for people with credit limits of at least $5,000. You carry a Tweedledee credit card with a $5,000 limit. Technically, your name should be on the list Whatchamacallit buys from the credit bureaus.
But Tweedledee doesn’t want Whatchamacallit to steal your business, so it reports your limit as only $3,000.
Your name is not included in Whatchamacallit’s list, so you do not receive the competing credit card offer.
You do, however, receive a credit card solicitation from John Q. Credit Card Company, which offers a new credit card with a $3,000 limit.
When you receive the offer, you immediately toss it in the garbage, thinking to yourself, “Why would I get a John Q. credit card with only a $3,000 limit when I already have a Tweedledee credit card with a $5,000 limit?”
Voila! Tweedledee has successfully kept you as a customer.
But here is where the credit scoring scam gets really dirty. About 30 percent of your credit score is based on the amount of money you owe. Credit scoring formula want to know how much you owe based as a percentage of your credit limit. This balance-to-limit ratio is called a “utilization rate.” The credit scoring bureaus will award you more points if your utilization rate is below 30 percent.
For instance, if you have a $1,500 balance on a credit card with a $5,000 limit, you have a 30 percent utilization rate. If you have a $1,500 balance on a credit card with a $3,000 limit, you have a 50 percent utilization rate. In other words, you are utilizing 50 percent of the available limit.
So when Tweedledee reports your limit as lower than it actually is, your utilization rate appears higher than it actually is, and your credit score plummets.
The credit scoring bureaus assume that someone with a high utilization rate is suffering from a financial drought and might be unable to pay his or her bills. On the other hand, a utilization rate below 30 percent indicates that your finances are in order.
In other words, this credit scoring scam can mean the difference between a good credit score and a poor credit score. In turn, this can mean the difference between low interest rates and high interest rates.
How to Fix the Credit Scoring Scam
Start by pulling your credit report. Check your credit card limits and make sure they are being reported accurately.
If any of your limits are being reported inaccurately, call your credit card companies and tell them to report the accurate limit. They might refuse. (Shockingly, this credit scoring scam is legal.) If they refuse, tell them you plan to stop using that card until they report the proper limit.
You might even threaten to close the account, though I don’t suggest carrying through with this threat. Closing a credit card can hurt your score. Nonetheless, the threat might be enough to get the credit card company to report the accurate information
Next, send a letter to the credit scoring bureaus asking them to correct the information. Be sure to send your credit card statement as proof of your actual limit.
Then follow up. Keep calling the credit card company until they correct this credit scoring scam. Be sure to pull your credit report every six months to make sure the mistake hasn’t resurfaced.
This guest post was submitted by Philip Tirone, a credit expert who teaches people how to build credit and avoid pitfalls.
If you would like to contribute a guest post, click here.