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Three newly-filed federal class action suits challenge a little-known practice that harms mortgage applicants by depressing their credit scores behind their backs. The suits, filed in U.S. district court in Greenville, S,C., name the three national credit bureaus -- Equifax, Experian and Trans Union -- as defendants.

The practice in dispute involves a major credit card issuer intentionally withholding key information about customers' credit profiles from reports to the national bureaus. The card company, Capital One, which has millions of customers nationwide, was not named as a defendant in the class actions. The suits argue instead that the three bureaus violate the federal Fair Credit Reporting Act by not requiring Capital One to report on its clients fully.

Capital One says it withholds card customers' credit limits as a matter of corporate policy. It has never spelled out the reason, but credit industry experts say the company doesn't want competitors to identify and poach its customers by trolling through the national credit databases for prospects.

How does withholding limits achieve that? Simple: The dominant credit scoring model in the consumer finance marketplace -- Fair Isaac Corp.'s FICO score -- gives significant weight to a consumer's use of his or her available credit. To illustrate, if a card carries a $10,000 limit and the consumer is running a $9,000 monthly balance, that's a 90 percent "utilization ratio." Any ratio above 50 percent makes the consumer appear to be a heavy user, and tends to lower the consumer's FICO score.

Ratios below 50 percent, by contrast, make the consumer appear to be a more moderate, restrained user of available credit -- and a safer bet to repay on time and avoid default. That tends to increase the consumer's FICO score.

When a company like Capital One fails to report credit limits, the FICO scoring software generally substitutes the consumer's highest balance for purposes of computing the utilization ratio. The highest balance often is lower than the maximum limit, and that raises utilization ratios and lowers scores.

Take this example: Say your card limit is $10,000 and your highest balance was $4,000. That's a moderate 40 percent utilization ratio. But let's say that you often run a balance of $3,500 a month or higher. When your credit card company doesn't report your $10,000 limit -- and the scoring software substitutes your $4,000 high balance as your limit -- you suddenly look like a heavy user, with utilization ratios of 75 percent or 80 percent or higher. While your FICO score should be increased by your moderate use of your credit card, in fact it is artificially depressed because, behind your back, your credit card company withholds your limit from Equifax, Experian and Trans Union.

Depending on all the data in your credit files, your FICOs could be depressed by anywhere from 20 points to 50 points or more, according to Terry Clemans, executive director of the National Credit Reporting Association. That score decrease, in turn, could cost you a full percentage point when you apply for a mortgage -- and thousands of dollars over the term of the loan -- according to Fair Isaac's website.

Though aimed at changing Capital One's policy of non-reporting, the suits do not challenge its legal right to do so. Instead plaintiff William A. Harris, Sr., charges Equifax, Experian and Trans Union with failure to comply with the Fair Credit Reporting Act. That law requires the bureaus to follow "reasonable procedures to assure maximum possible accuracy of information in consumer (credit) reports."

The bureaus know full well that Capital One's withholding of credit limits renders consumers' files inaccurate and incomplete, said an attorney for Harris. Yet they permit Capital One to continue its policy. The suits seek to force the bureaus to require full and accurate reporting on all consumers, said the attorney.

Other industry experts say Capital One is hardly the only creditor that selectively withholds information. Some subprime mortgage lenders don't report any of their clients' on-time payments to the national bureaus, thereby lowering the positive information in their files and depressing credit scores. A Federal Reserve study of a sample of 301,000 consumer credit files two years ago found that 46 percent of all consumers were missing at least one credit limit.

A spokesman for Experian said the firm never comments on ongoing litigation. Representatives of Equifax and Trans Union did not respond to requests for comment.

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