credit cards

Closed accounts, lower limits

Thursday, Dec. 18
Posted 2 p.m.

The domino effect of closed accounts, lower limits

Bankrate reporter Leslie McFadden contributed this entry.

On a daily basis, my editor Ellen Cannon and I receive reader complaints about credit card issuers making unwanted account changes.

The closing of an account, the raising of an interest rate, the addition of a new fee or a lower credit limit cause their own frustrations, but some of these adverse changes can also harm your credit score. Credit scores are based only on the information in your credit report. Since rate and fee information isn't reported to the credit bureaus, a new fee or higher rate won't directly impact the three-digit number.

"It's the credit limit reductions and closures of accounts that can have a domino effect on credit scores and the perception of creditworthiness of other creditors," says Greg McBride, senior financial analyst for Bankrate.com.

Having a lower credit limit or closed account can raise your utilization, or debt-to-available-credit ratio on your credit cards, a factor that contributes 30 percent of the FICO score. The loss of a high credit limit can make a person look more heavily utilized.

Closing an older account can also shorten the length of your credit history, which counts for about 15 percent of your score. Closed accounts will fall off the credit report within 10 years.

The "domino effect" from the closed account or line reduction may come in the form of other card issuers scaling back your accounts. They might slash your credit limit, jack your rate or cancel your card, among other changes. If that happens, the score can take another hit.

In a time when the minimum credit score required to qualify for a loan is going up, those whose credit scores are heading south will find it harder to qualify for new credit. "It's all about credit quality right now," says McBride. "The higher the credit score, the better. The last thing a borrower needs is anything that would bring down their scores."

One key action that could mitigate the snowballing effects of lenders' adverse actions would be if Fair Isaac Corp., which created the popular FICO score, tweaked its scoring formulas. I asked if the company had any such plans.

"Fair Isaac is taking a look at this question of the impact that credit limit decreases has on FICO scores," says Craig Watts, public relations senior manager. He expects Fair Isaac to finish its research sometime in January, but did not elaborate on what the company might do in light of its findings.

Comments? Questions? E-mail me at Plastic_Rap at Bankrate.com.

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