Your credit score plays a critical role in helping you qualify for new loans and credit cards. In addition, people with good credit scores are typically offered lower interest rates than people with bad credit scores. One of the many elements that goes into calculating your credit score is your credit utilization ratio. When a credit limit is not shown on your credit report, this can negatively affect your utilization ratio and lower your score.
Credit Utilization Ratio
Your credit utilization ratio is defined as the ratio of your actual debt to your potential debt. With credit cards, your potential debt on each card is the credit limit on the card. For example, if you have a card with a $4,000 credit limit and you owe $2,800 on the card, your utilization ratio is 70 percent. If you pay down the balance so you owe $1,000, your ratio drops to 25 percent. A lower utilization ratio leads to a better credit score.
No Credit Limit
Cards with no credit limit reported adversely affect the calculation of the credit utilization ratio. This is because the credit scoring formula typically substitutes your highest balance on the card for your credit limit, according to Bankrate. For example, say you have a card with an unlimited credit line, but the most you have charged on it is $1,000 and you still carry a balance of $800. The credit scoring model will calculate a utilization ratio of 80 percent, which is likely to hurt your credit score. However, this is not an accurate representation of the situation because your credit limit is not actually $1,000.
Significance
According to "The New York Times," some consumers would see their scores increase by 10 points or more if their actual credit limits were reported. In extreme cases with people who do not have much information on their credit report, scores can be 50 points lower without the credit limit reported than they would be with the limit. This can significantly affect whether a person is approved for credit and how much he has to pay in interest.
Strategies for Repair
If your credit limit does not appear on your credit report or is being shown as something lower than your actual limit, call your credit card company and ask for the information to be corrected. However, if your credit card is of the type that does not have a limit, it is not possible for a limit to be reported on the credit file. One strategy to boost your credit score is to run up a very large balance on your credit card one month and pay it off immediately. That way, the large balance will show as your credit limit, your utilization ratio will decrease and your score will increase.
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