The scariest part of the fall isn't Halloween this year; it's the meltdown of the financial world. And now credit cardholders are beginning to see the horror of it all.
Over the past few weeks, Bankrate readers have been telling us their tales of credit card limits slashed and cards canceled. And each of them has wondered what effect these moves will have on their credit scores.
Before we share their stories, we'll pass on the advice of an expert on FICO scores -- Craig Watts, the public affairs manager of Fair Isaac Corp. Here's what he wrote when asked what would happen to a cardholder's credit score:
"Reducing a credit card's limit or canceling an inactive card may have no effect on a person's FICO score or it may lower the score at least a little, but it likely won't improve the score. Any effect on a person's FICO score really depends on what other information is on the person's credit report. The simplest way to minimize any score change from either action -- reducing a card limit or cancelling a card account -- is to keep balances low on all of your active credit cards. That doesn't mean paying off the balance due in full each month, although that's a wonderful habit by itself. It means keeping the amount low on the monthly bill received from the card issuer, because that's the balance that most card issuers report to the credit bureaus, who then post it on your credit report, where it becomes available for calculating FICO scores.
"So your readers' worry is resolved if they follow the three guidelines for getting a good FICO score: pay all bills on time, keep balances low on revolving accounts, and take on new credit only when you really need it."
Most of the readers who contacted us have been following that advice. They've played by the rules for managing their credit and still they're scorched in the credit bonfire. Read these credit card horror stories:
90 percent reduction
I received a Macy's Visa back in 2005 that I didn't even recall applying for. The credit limit was $5,000. Nevertheless, I didn't use it until this year. I had planned a trip to Disney in Florida and wanted to use it then. I called to activate it and found out that my limit was reduced to $500. How drastic was that?!
-- Patricia S.
Bruised credit scores
I am 49 years old and have been employed since 1993, when I graduated from law school. My wife and I have lived in the same home since 2000. Neither my wife nor I have any late payments on any obligation we have had over the last 10 years or more. We do, however, have a good deal of credit card debt, very nearly all of it at 4.99 percent or less. Our annual household income is over $90,000 and our total monthly debt payments, including my student loans, our credit cards and our mortgage is about $2,400. My wife's credit score was about 720 and mine about 690.
A few months ago, Bank of America advised rather abruptly that it was cutting our cards' credit lines by a total of about $30,000. This increased our credit utilization ratio rather dramatically, and it has begun affecting our credit scores. My wife's score has dropped by over 50 points and mine by an even greater amount. In turn, I believe other credit issuers will begin cutting our credit limits. We just received notice from American Express, for example, that my wife's card limit through them will be cut by over $5,000. No doubt actions such as this will further depress our credit scores. As a consequence of their actions, my wife and I are seriously considering severing our relationships with Bank of America and American Express. Although this sounds like the proverbial cutting off of one's nose to spite one's face, I don't know what else to do to express my displeasure with these companies other than discontinuing their opportunities to profit from my patronage.
-- Doug H.
My AmEx card limit was cut by $5,000 and I never missed a payment. The usual excuse of balances on other cards are too high or too many revolving -- or we just feel like screwing you because we can.
You're fired! I quit!
I heard that if a credit card issuer cancels your card, it can affect your FICO score. So, after 11 months of nonactivity on my AT&T card, I charged and paid off my card. The next month, I received a letter from them that they were going to cancel my credit card. Not wanting them to cancel it, I called them and told them that I wanted to cancel my card, due to nonactivity. They then transferred me to an accounts adjuster, who offered me a 3.99 percent fixed APR on higher interest cards till the bill was paid off. I transferred balances on two higher interest cards, and they are keeping this account open.
-- Gene W.
My American Express credit line got cut down to less than half the credit limit from $10,000 to the current balance I had at the time. I found out about it when I went to do a $33 purchase and was told it did not go through. I said, "Something is wrong," and we called and then I was informed by AmEx that the credit limit got lowered due to a report from the credit bureau. I found out a week later -- by pulling my report from three bureaus -- that was incorrect because they did not pull credit through any of the three bureaus. There had been no inquiries, and my payments had always been on time and always paid 50 percent more than the amount due.
Knowledge overcomes fear
Yes, I was a victim of this "credit limit downsize." As a matter of fact, I received a letter from my Sears MasterCard (credit card issued by Citibank, South Dakota) on Thursday and read the letter. I was shocked -- my credit limit plummeted from $7,850 to $4,900. Here is what they wrote:
"... wanted to let you know about a change being made to your account. Your credit line is being lowered to reflect your spending. We strive to be proactive in providing our valuable customers with a credit card that meets their shopping needs. Based on your spending history, and since you are currently only using a small portion of the available credit, we lowered your credit line to $4,900."
What a crock! That was my first reaction. I am very aware with the happenings with the economy and credit crunch. After reading the letter about five times just to be sure I was reading it right, I felt that they betrayed me. So I called the number they provided and spoke with a lady. I asked her why my credit limit was reduced. I asked, "Was it because of the slow economy and the credit crunch that they are doing this?" You will not believe what her response was: "Oh, we did that because with the credit card fraud that's going on, we had to protect you if someone were to place a fraudulent charge on your card. So this high credit limit attracts credit card fraud. And we are trying to eliminate that issue of attraction of being a victim."
So I asked her, "how does that compute? My credit score is impeccable. Recently, I purchased a major item, which means that my credit limit and credit balance is out of ratio and out of whack. And this will affect my credit score reading." Her response was: "Oh, we only report credit to the bureaus after 60 days." I said: "So? I am glad that it will only be reported after 60 days, as this better not be on my credit report. I am not pleased with this change without notifying me. I even checked on the Web site that the credit limit was already reduced." Her response: "Well, you are not the only one who is not happy about this reduction." So I said: "Of course I am not happy, nor is anyone else. This kills my credit score."
So she asked me if I wanted back my original credit limit? I said: "Of course! I earned that limit and I demand this original limit be retained." And I asked her to retain my APR. So in the end, I thanked her for listening and being patient with me. After that call, I checked my online account statement, and indeed she changed it back to its original number.
What I learned from this experience is never to let the credit company bully you into their nonsense of "protecting you from fraud" story. I did not buy it; instead, I stood up for myself and blasted her with crucial information. I was knowledgeable about the information presented to me from previous readings at Bankrate.com. So thank you for equipping me with a priceless education about the financial world. It's a scary world out there!