How Some Credit Cards Harm Credit Scores

Whether consumers care to admit it or not, one of the most important numbers in one's financial life -- perhaps in one's life overall -- is the credit score. For a typical American, the credit score along with the full credit report could dictate how easily you will be able to build wealth.

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The best example of this is the typical home mortgage. A low credit score with a troubled credit history, two situations that often complement each other, could easily result in a borrower paying tens of thousands or hundreds of thousands dollars more in interest than she would have with an excellent score. If purchasing a home and relying on a loan is in your future, the health of your credit should be a primary concern. Even small mistakes could have costly repercussions.

As building good credit is a fact of life for most consumers, it makes sense to ensure even your smallest decisions with money don't inadvertently hurt your credit score. Knowing how a credit score is calculated is helpful to make the best decisions, and one important factor in all varieties of these scores is the credit utilization ratio.

The credit utilization ratio is the percentage of your total credit limit that is actively used. The credit bureaus that compile reports and produce scores, Equifax, Experian, and TransUnion, rely on the credit card companies to provide accurate information about your debt level and credit limits. Unfortunately, an increasing number of credit companies bend the rules for their own benefit.

For example, consider using a Citi World MasterCard with a $5,000 credit limit. You pay the bill in full every month, but at the time Citi reported your balance to the credit bureaus, you owed $500. Most credit cards would report these two numbers to the bureaus, resulting in a credit utilization ratio of 10 percent. However, this credit card and some others have a different process; rather than reporting your $5,000 credit limit, they report the maximum you've spent using the credit card, perhaps $750. Through no fault of your own, your utilization ratio is now 67 percent.

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While 10 percent is considered low and would unlikely affect your credit score, a ratio of 67 percent will certainly reduce the number. This is a significant advantage for the credit card industry. The more credit cards that report an artificially high utilization ratio, the easier it will be for any credit card issuer to justify increasing consumers' interest rates. An affected consumer will pay higher mortgage interest rates, if he qualifies for a loan at all.

Consider the credit cards you own and check your credit reports to ensure your credit cards are reporting your true credit limits. If not, call each issuer and request -- or demand -- to switch to a card that does.

Luke Landes writes for Consumerism Commentary, where he encourages discussions about money and consumer issues. Consumerism Commentary regularly tracks and reviews the best online savings accounts and other financial products.

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