What's in Your Credit Report?

I understand that when my credit score is calculated, one factor that's considered is my balance as a percentage of my credit limit. But my credit-card issuer, Capital One, does not report credit limits to the credit bureaus, so they show a limit of $0 on my report. Can I do something to get around this policy and improve my score? -- Harvey Cohen, Arbutus, Md.

All Capital One customers should be as informed as you are about the company's policy. Capital One doesn't report its customers' credit limits because "we have always considered that a proprietary, competitive part of our business," says spokeswoman Diana Don.

But that policy can hurt your credit score. You're correct that when Fair Isaac compiles its so-called FICO scores, the company factors in what percentage of your credit limit you've actually used. The lower your "utilization ratio," the better. In the absence of a credit limit, the FICO system substitutes the highest reported balance from that creditor, explains Craig Watts, of Fair Isaac.

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Unfortunately, that means good payment habits on your account could accidentally result in a lower score. Let's say your credit limit is $10,000, but you've never owed more than $1,000 and you typically pay your bill in full each month. Then you charge $500. "It looks like you're using 50% of your total credit available, even though your actual limit is much higher," says Gerri Detweiler, of EverydayWealth.com. It's usually best to keep your utilization ratio to 25% or less when you're about to apply for a loan.

If you're planning to borrow money for a house or a car, one way to keep your credit score high is to make a big purchase on your Capital One card at least six months before you plan to take out the loan. That would boost your highest balance and improve your utilization ratio -- provided you paid the bill in full before any interest was due.

An even easier solution: Use the card of a different issuer, almost all of which do report credit limits. Capital One is a major player, but "this isn't even remotely an issue for most credit-card users," says Watts. To check on whether your issuer reports credit limits (and whether they're accurate), get a free copy of your credit report at www.annualcreditreport.com (877-322-8228).

Sell I-bonds?

The interest rate on inflation-protected savings bonds, or I-bonds, has declined from 6.7% to 2.4%. I hold $63,000 in I-bonds, which I bought in 2003. If I redeem them before five years, I face a three-month interest penalty. I was thinking of selling anyway and buying CDs at 5.25%. -- Name withheld

Hang on to the I-bonds. The interest rate for I-bonds has two components: a fixed rate that lasts for the 30-year life of the bond plus an inflation adjustment that changes semiannually, in May and November. Bonds purchased from now until November 1 pay a fixed rate of 1.4% plus the inflation adjustment.

But investors who already owned bonds earn a different fixed rate. Depending on when you bought your bonds in 2003, you're earning either 1.6% or 1.1%. And individuals who purchased bonds before November 2001 may be earning a fixed rate of 3% or more.

And then there's the inflation component -- which is, after all, why you purchased the bond. The current inflation factor, which is 1% on an annualized basis, reflects consumer price index numbers from September 2005 to March 2006 -- a six-month period with "abnormally low inflation," says Dan Pederson, author of Savings Bonds: When to Hold, When to Fold and Everything In-Between. That rate is almost certain to rise in November, says Pederson, reflecting an uptick in inflation since March.

Jack Quinn, founder of Savingsbonds.com, cites two other reasons for keeping your bonds: penalties and taxes. As you mentioned, you'd have to pay a three-month interest penalty if you cashed in the bonds before holding them for five years. And you'd owe taxes on the earnings when you cashed out, giving you less money to invest in the CD.

Think of I-bonds as a long-term inflation hedge. "You're getting a good rate of interest overall, and you have a shot at getting an even better rate a few years from now," says Quinn.

A college portfolio

I have Coverdell education savings accounts for each of my three children, ages 7, 5 and 1. All of the accounts are invested in Vanguard 500 Index fund. As my children get closer to college, should I transition to a bond fund? -- Cmdr. Clyde Mays, USN, Stuttgart, Germany

You're on the right track. But while your children are still young, why not broaden your investments beyond a fund that follows Standard & Poor's 500-stock index? Lee Baker, a financial planner in Tucker, Ga., recommends placing 70% of your savings in Vanguard Total Stock Market Index (symbol VTSMX; 800-635-1511), which includes more small-company stocks than the 500 Index fund. To further diversify, Baker suggests putting 15% in Vanguard Total International Stock Index (VGTSX); 10% in Vanguard REIT Index (VGSIX), which invests in real estate stocks; and 5% in Vanguard Intermediate-Term Bond Index (VBIIX).

As each child starts his or her junior year in high school, place enough cash in a money-market fund to cover that child's first year of college bills, Baker advises. Rejigger what's left in the child's account so 30% to 40% of the assets are in bond funds. Keep the shrunken stock funds in the same proportions that existed earlier. Repeat the same step every year until all the assets are in a money-market fund. "The key is to be consistent," says Baker.

My thanks to Steve Goldberg for his help this month.