Lenders Cut Credit for On-Time Payers

April 06, 2009 02:59 PM
by Anne Szustek
Credit card customers with good credit and low balances are seeing their credit limits cut because they pay less in card maintenance fees.

FICO Scoring System Under Revision

Credit card companies are cutting credit limits or closing the accounts of credit card customers with good credit who use their cards infrequently and carry little to no balance.

According to statistics from Fair Isaac (the group behind FICO credit scores) that were published by USA Today, “11% of U.S. consumers, about 22 million people, had their lines cut or account closed even though they pay their bills on time and have good credit” during the six-month period ending in October 2008. In that same time period, only about half that number had their credit lines cut due to bad credit.

Historically, reliable borrowers have been spared scrutiny; but given that this group does not allow interest to accrue on their balances or incur over-the-limit fees, they do not generate a large amount of cash for lenders’ reserves.

Banks seem likely to continue slashing credit lines; bank analyst Meredith Whitney told USA Today that she estimates that banks will cut credit on cards by $2.7 trillion by the end of 2010. Meanwhile, lower credit limits can have an adverse effect on consumers’ credit ratings, as a person’s total available credit factors heavily into FICO scores, and perhaps even more so once Fair Isaac’s revised credit scoring rubric is put into use.
According to a Boston Globe financial blog post, FICO’s new scoring system will allow for slightly more leeway in terms of late payments, in that the occasional tardy installment will carry less of a penalty on credit ratings. But more notably, customers’ credit balances are going to count for more. Credit utilization, or how much of a consumer’s available revolving credit regularly gets used, will be a greater factor in terms of assessing a given person’s risk profile.

The Boston Globe blogger advises that the best way to preserve a high FICO score is to pay balances down to no more than 50 percent of one’s credit limit.

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Background: Credit cards hike up interest rates, Senate introduces credit card reform bill

With the tightening credit market has come a sudden spike in credit card interest rates by several issuers. “For low-interest cards, which have rates below the national average but are often offered only to customers with strong credit histories, the average APR was 11.58 percent” the week of March 23, “up from 11.55 percent the week before,” according to statistics cited by the Associated Press and quoted by findingDulcinea. Interest rate hikes further aggravate the woes of the many Americans wrestling with seemingly out-of-control credit card balances. In early March, it was announced that the number of credit card defaults in the United States was the highest ever in 20 years.

In a bid to rein in what has been seen by some as abusive credit card practices, last week the U.S. Senate Banking Committee pushed through the Credit Card Accountability, Responsibility and Disclosure Act, or CARD Act. The legislation, among other things, would prevent credit card companies from “unfairly” raising interest rates, raising rates retroactively on old balances, curb some over-the-limit fees and put new regulations on card issuance to those under the age of 21.

Related Topic: Credit card debtors seek support online

The strain of unpaid credit card accounts has debtors so overwhelmed, they’re seeking support from outsiders. Debtors Anonymous, debt management Meetup groups and similar organizations have seen increased membership, while postings on iVillage’s debt relief message boards have risen 81 percent, according to a June article in The Wall Street Journal mentioned by findingDulcinea.

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