Credit limit cuts shouldn’t cause panic for consumers who use their cards wisely
FICO found that about 1 in 5 consumers had their credit lines reduced. The average reduction in credit limit was $5,100. In the latest sampling of the 33 million who had their credit limits reduced, researchers found that the credit reports for nearly 9 million contained recent negative credit dings such as late payments. It was such information that may have prompted lenders to reduce those customers’ limits. So what about the good users with no reported negative information in their credit files?
FICO found that 24 million cardholders whose limits were cut did not have any new negative information in their files. In fact, this group had a median FICO score of 760, on a scale of 300 to 850. This is what happened to their scores after their limits were reduced:
■ 12 million saw an increase.
■ About 8.5 million saw their scores drop 20 points or less.
■ 3.5 million saw no change.
Of course, it would only be fair to point out that FICO has a vested interest in the survey outcome. After all, most of the lenders are relying on the credit scoring models to determine who is creditworthy. Still, the study may help ease the fears of the many cardholders.
Many consumers have told me they’re so outraged that their issuers have lowered their limits that they want to close their accounts. But what would this do to their scores? I put that question to Craig Watts, FICO public affairs director. Here’s what he had to say:
Q. Will it lower my score if my lender (and not me) closes my credit account?
A. No. It doesn’t matter to your FICO score who closed the account.
Q. Will closing a card shorten my credit history?
A. No. Credit bureaus keep records of closed accounts for years (seven years for negative information, longer for positive information). So a closed account will continue to appear on your credit report.
Q. If I close an account that still shows a balance, how will that affect my score?
A. The outstanding balance of your closed account will continue to influence your overall credit utilization rate, so paying off that balance should still be a priority. If you miss a payment and are reported 30 days, it will hurt your score.
Whether a card closure or credit line cut will affect your FICO score depends on what else is in your credit report. But at least the FICO study shows that if you’re using credit wisely, reduced credit limits shouldn’t give you a credit panic attack.
Michelle Singletary is a columnist for The Washington Post.