Getting Credit Limits Cut? Watch Your Credit Scores!
In their continuing effort to cut off their losses, decrease their risk exposure and prepare for the credit card bill, credit card companies are making several changes to the way they offer their services. However, many of these changes may actually be having a bad effect on your credit score, such as what happens when you get your credit limits cut.
A recent study to be released on Thursday indicate that credit card companies have lowered the available credit of around 24 million credit card holders who are on time in paying their bills. According to the study, around one third of these credit card holders have seen their credit scores go down during a period of six months.
The study will be released by Fair Isaac, the FICO credit score creator. FICO is a widely used credit scoring standard in the credit industry. The study by shows that, from October 2008 up to April 2009, 8.5 million consumers saw their credit scores fall after they experienced a reduction in their available credit. The average reduction was at $5,100. A worrying detail in the study is the fact that these consumers were not risky borrowers and had no late payments. Nevertheless, a majority still experienced an average credit score drop of under 20 points. Around 500,000 of them also experienced credit score drops of 40 points or more.
Vice president of Fair Isaac said that the impact of the credit line cut offs are only having minimal effects on consumer credit scores. According to her, credit card companies are targeting accounts with low balances or are inactive. However, Credit.com president for consumer education John Ulzheimer argues that this only “minimizes” the actual effects that the credit card company’s actions are having on their clientèles’ credit scores.
Notably, the utilization ratio, a very important number in determining a consumer’s credit score, is easily affected by any changes in available credit. The utilization ratio measures the debt that a borrower carries against his available credit. Thus, if a borrower carries some balance and the available credit suddenly gets cut, obviously the utilization ratio will go up which will then have a negative effect on the borrower’s credit score.
A consumer with a high credit score, say around 800, can still afford to lose some credit score points. If he loses 20 points, then he will still belong in the upper median. Consumers who are in the median range, on the other hand, will see a huge impact if their credit scores go lower. The problem gets even more difficult to accept and correct because of the fact that the credit score drops are being caused not by them but by the credit card companies.
