Monday, Aug. 24
Posted 11 a.m. EDT
Bankrate reporter Leslie McFadden contributed this entry.
A new study from Minneapolis-based credit score developer FICO finds that widespread credit limit cuts and account closures haven't punished consumer credit scores. Reductions in credit lines not triggered by increased risk hurt the scores of only 8.5 million consumers, typically by less than 20 points.
About 33 million credit cardholders saw their credit lines cut between April 2008 and April 2009. Most -- about 24 million -- didn't have any recent negative items in their credit reports that triggered the decrease. This group generally managed credit wisely, and had low account balances, a long credit history and few missed payments.
It's worth pointing out that a loss in available credit doesn't by itself hurt your FICO score. "Unlike some other bureau scores, FICO scores do not consider a consumer's available credit as a stand-alone characteristic for which a consumer might lose points if a lender were to reduce or close his/her account," the report states. Rather, the scoring formula considers the balances owed in relation to the available credit.
Having a lower limit or closed account can make you appear to be using more of your remaining available credit, though, and that can hurt your score. You can minimize the score damage by reducing account balances.
FICO general manager and vice president of scoring Robert Duque-Ribeiro pointed to conservative credit management as an explanation for the stability in scores.
"The findings from our study suggest that many people whose limits were reduced lowered their balances on other revolving accounts and in general managed their credit conservatively. These practices resulted in their ability to sustain or improve their scores despite reductions in their credit card limits," he stated in the company's press release.
As part of the same study FICO also looked at average score decreases for simulated credit limit reductions. Even when the credit limit was slashed by up to 50 percent of the original limit, a FICO score of 719 dropped only nine points. Consumers who had short credit histories, few accounts or "moderate" levels of utilization were more likely to see a bigger dip in their score.
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