Even though they call them reality TV shows, you wonder about how close they are to reality. I am also always amazed at how we are so ready to abandon reality when it comes to financial affairs.  There is a reality to financial affairs that is very much rooted on common sense, and it works year after year after year, decade after decade.

Yet there are times when the "irrational exuberance" of people leads them to believe something different than what is reality based. For example, we know that the Price Earnings Ratio, P/E, is normally between 15 and 20.  Growth companies that have an ability to grow faster and produce earnings faster than the economy in general command P/E ratios that are higher than average.

Yet during the dot com boom, even concepts like earnings went out the window.  Valuations, if you can call them that, were based upon website traffic without any reference to how that traffic might be turned into revenue and, ultimately, earnings, at some point in the future.

Of course, we all know that in many cases, the management of those companies were spending a significant portion of their time flying around the world trying to attract the next level of financing as they spent money at a prodigious rate, what a friend of mine referred to as "spending their way to glory."  This process of going through cash without much revenue coming in actually got a name - burn rate.  That was the number of months the company could continue to spend money before they went out of business or attracted the next level of financing.

Of course, we know how that turned out. Stock market losses wiped out investment value. Reality finally asserted itself.

We have had a similar situation with subprime lending. It was obvious to everyone in the business that the subprime lenders had departed from this reality and were operating in a galaxy far, far away. Initially, I think that the parties involved really thought that traditional underwriting practices as developed largely by FannieMae and FreddieMac were out-dated.

There is some evidence to support that contention, should anyone want to make it. For example, when they developed their automated underwriting engines in the late 1990s, we quickly found out that the criteria they were using departed significantly from what their own underwriting guidelines that were being used by human underwriters. The computers were being far more liberal in applying rules.

It doesn't mean they were bad loans, just ones that no human underwriter would have thought prudent.  My guess is, however, that the loans that were approved under the more liberal computer rules had a delinquency and foreclosure rate that was no different than the performance of loans that were underwritten under the old, stricter rules. The new rules were just not as strict, but still reality-based.

What happened with the subprime lenders was that they simply threw out the rule books altogether.  The executives and other employees became so addicted to the massive amounts of money they were making, - two, three, four times or more than what ethical lenders were earning on comparable loans – that they just didn't want to quit. They would approve anything!

Reality appears to be finally rearing its ugly head and we're seeing the consequences.

The Case of the Disappearing Credit Limits

How having the wrong credit card can hurt your credit score.

When it comes to how credit cards affect your credit score, they are all pretty much the same…right? WRONG. Credit card companies that do not report your individual credit limit to the credit bureaus can have a real negative impact on your credit score.

Why does the practice of not reporting your credit limit to the credit bureaus (Equifax, Experian and TransUnion) lower your Credit Score

According to Fair Isaac, the company that devised the scoring models used by most financial institutions, 30% of your score is based on the dollar amounts owed on all of your accounts. In the case of a loan, this is the amount owed in relationship to the original debt. In the case of a credit card it is the outstanding balance in relationship to the credit limit on the card. For example, if you had a credit card with a balance of $1,000 owed, and a credit limit of $5,000, your ratio of amount owed to credit limit is 20%. The lower the ratio you have, the higher your score.

In many cases, this missing credit limit can cause a decrease in your credit score. In situations where your credit limit is above $9,000, the potential damage from non-reporting is greater. However, people with very low credit limits could actually benefit from the lack of credit limit information on their credit card record. A person with a credit limit of $500 who regularly has a balance of $400 or more could be avoiding credit card damages by not having their limits reported.

So why are some credit card companies, such as Capital One, not reporting your credit limits to the credit bureaus? Most insiders say that it is because they want to keep you as a customer. By not reporting your credit limits, they make you look less desirable to credit card competitors. Without being able to see your credit limits, competitors can’t fully evaluate your worth as a customer.

Is this practice of not reporting your credit limit legal? Yes. Do these companies disclose this information up front, so you can decide whether you want to have a credit card that does not report your credit limits to the bureaus? No.

I spoke with a gentleman in the Capital One legal affairs department last week about this topic. I asked him if Capital One would record credit limits if a customer made a specific request in writing to have their limits sent to the bureaus. He said that they would not report the limits, even with a written request by a current card holder. I asked him if he would put that in writing and send it to me, but he declined.

So, what should you do if you are shopping for a credit card? I would recommend asking the credit card company if they report credit limits to the credit bureaus before you apply. If they do not, I would move on to another credit card company that does report your credit limits to the bureaus.

What if you already have a credit card that does not report your credit limits to the bureaus? That is a much more complicated answer, and depends on how long you have had the card, what your balance is, what kind of rates you have, whether you are planning on making a major purchase soon and need the highest credit score possible, and other factors. Here is what I would do: If I had the card for more than one year, I would pay the balance down to as close to zero as I could, but keep the card open. Length of credit history of all your accounts counts for approximately 15% of your total score, and closing satisfactory accounts can lower your credit score.

So, beware of what is in your wallet. If your card company is not reporting your credit limits to the credit bureaus, this practice could be hurting your credit score.