Credit Score Company Issues Report on How Credit Line Cuts Affect Credit Scores
The original credit score company, FICO recently released an interesting report regarding credit lines and how cutting the limits can significant affect credit scores. 11% of the U.S. population, or 22 million consumers, lost some of their credit limits for a reason other than risky credit activity such as making payments late, having accounts go to collections, or having a negative public record added to their credit report during the study time frame. Credit card inactivity or low balances likely caused the lowered credit limits for this group. The median FICO score in this group is 770, so the adverse changes to their credit limits are not a result of poor credit risk.
5 % of the population, or 10 million consumers, saw their limits reduced because of some sort of risky credit activity including late payments, accounts in collections, or a negative public record added on their credit reports. Credit scores remained relatively stable during the April–October time frame, although there was significant score movement in 10% of the general population that received a credit limit decrease. A score decrease of at least 40 points occurred in 4% of that group and a score increase of at least 40 points occurred in 6% of that group. The score decrease is likely due in part to an increased credit utilization percentage, while the score increase is likely due to the reduction of credit card balances.
According to FICO credit card utilization remains a vital component in calculating your credit scores. FICO also stated in their recent report, that accessing credit may have “proven to be extremely predictive of potential repayment risk, so it is often an important factor in a person’s score… Consumers who use a heavy proportion of credit available to them are substantially more likely to default on credit obligations”, compared to people whose credit lines have hardly been used.
Also read credit line article > Thousands of Credit Card Consumers Report Credit Line Reductions in 2008.
As always, consumers will earn better scores if they make all of their payments on time; avoid other negative occurrences such as collections; keep their credit card balances low in proportion to their credit limits; and shop for credit only when necessary. The target utilization percentage is, and has been for some time, less than 10%. Recent debt relief articles published highlighted the fact that the foreclosure crisis and credit card defaults have caused the credit repair business to experience considerable growth as a result.
