Card Holders Getting Hurt With Credit Line Cuts For The Long Term

Its called a credit score and its what banks and other financial institutions use to gauge how much of a risk a borrower is. Basically, the higher the borrower’s score, the better the chances of him securing a loan, not to mention the easier loan arrangements. American consumers understand very well how important a credit score is and are very aware of them. A lot of the more financially savvy consumers do their best to keep their credit scores high. Unfortunately, what credit card companies have been doing recently are hitting the credit scores of millions of Americans. Many are seeing their credit scores fall, largely through no fault of their own.

As credit card companies try to weather the stale economy and the upcoming Credit CARD (Card Accountability, Responsibility and Disclosure) Act, they have been busy changing many details about their credit card business which are having a negative effect on the credit scores of many American consumers.

One particularly glaring example of actions of credit card companies that are hurting credit card holders is the cutting down of credit card lines. A large part of credit scores depends on the ratio between the available credit that a credit card holder has and how much balance he carries. The ideal setup is large available credit paired with low or zero balance. However, when a credit card company closes a credit card holders credit card line, his available credit will also be lowered. Thus, if he has a balance, his ratio will get smaller which results in a lower credit score.

Because credit card companies are cutting down large numbers of credit card lines, a large portion of credit card holders are getting hit on their credit scores. It is also surprising to note that a large part of credit card line reduction is being aimed at credit card holders who always pay their bills on time and who are careful not to go over their credit limits. Unfortunately, these people are natural targets for credit card line cuts. Because they have a lot of unused credit, the very reason why they have healthy credit scores, credit card companies are not seeing a lot of profit from them. Credit card companies are therefore cutting down their credit lines to free up more capital, as they are required to hold a capital against a credit card holders in case they ever default.

The practice of credit card line cutting down isn’t going to go away anytime soon, either. According to analyst Meredith Whitney, credit card companies will be eliminating $2.7 trillion of the available $5 trillion on credit cards. So credit card holders, if they haven’t gotten hit with a credit line cut, can expect their credit to be cut any time soon.