Responsible Consumers with Bad Credit Scores?

Because credit scores have been dropping for even the most responsible consumers, rumor has it that the change comes from changes in the FICO scoring model. The change actually comes from actions on the part of credit card issuers.

Lenders are steadily increasing the number of folks who are getting credit lines decreased and accounts closed - even though they have paid every statement on time and have not had a negative report from any other source. It only makes sense for creditors to minimize their risk and exposure to unsecured debt.

By now it's a well known fact that a late payment on one account can trigger a rise in interest or a credit line decrease on other accounts. But for many consumers that's not the excuse. In fact, the only excuse is "We wanted to."

A survey by the Federal Reserve Board showed that about half of domestic banks had reduced credit limits for new or existing cardholders, and the trend is apt to continue.

Meanwhile, the lowered credit limit lowers a consumer's overall credit score and can thus trigger similar reductions by other credit issuers - further reducing scores. This appears to be a snowball rolling downhill in which lenders, not consumers, are creating a riskier borrower.

Credit card issuers defend their actions by showing that the consumers hardest hit are the least profitable for them. These are borrowers with a low credit utilization ratio, carrying low balances, with a long credit history and few if any late or missed payments. To banks, unused cards and high credit limits signify risk without profitability, so they clip credit lines to reflect actual usage.

Some consumers are reporting credit limits cut to below their existing balances - with no prior notice. This triggers an over-limit fee and a blot on the card holder's credit report - along with the wrath of the card holder.

While some finance experts are calling for FICO to amend the scoring system to reflect changes made by card issuers, FICO is holding fast with 30% of the score riding on a consumer's debt-to-credit limit.

They defend their position by saying that consumers in this low-risk group are adjusting and bringing scores back quickly by curtailing use of credit cards and paying off balances.

This is just another example of the double messages being sent to American consumers. While the White House says "Spend more and stimulate the economy" FICO, credit card issuers, and financial advisors are saying "Spend less and protect yourself." Know your limits is key and not going over your head should make sense to almost everyone.


------

http://www.creditscorecowboy.com is the #1 source on the planet for a free credit report, identity theft software and a blog with a wealth of information writtten by lending professionals that know about credit and what determines ones creditworthiness.