If anybody should know what does and does not significantly affect a consumer’s credit score, it should be FICO. So why in the heck did they need to do a study to evaluate how many people out there are losing points on their score due to circumstances that are out of their hands?
The answer is likely in part because FICO (also known as Fair Isaac Corp.) has a vested interest in the results of the study. Has anybody else noticed that there is some serious competition going on in the credit scoring arena, with a number of different scoring models vying for the business of determining who is creditworthy ? With banks and lending institutions reducing consumer’s credit limits left and right, many of us have legitimate concerns about how these cuts will affect our ability to obtain credit in the future.
The results of the study, at least as FICO would like you to interpret this, should ease most creditworthy folk’s minds. In a nutshell, the study found that if you don’t carry a high balance and you are a responsible credit user (paying off your balance every month), the cuts will have minimal impact on your FICO credit score .
Overall, the study results indicated that approximately 33 million credit card holders in the U.S. (one out of every five credit card holders) had been notified of credit limit reductions during the time period of October 2008 to April 2009. Within that group, approximately 9 million credit card holders had justifiable “risk triggers” such as late payments that would normally result in an action to reduce their credit limit. The remaining 24 million consumers who had their credit limits involuntarily reduced even though they did not have any “risk triggers” associated with their accounts were the primary focus of the study.
Here is a summary of the findings within that group:
- Consumers in this group had a median FICO credit score of 760, based on the FICO scoring model’s 300-850(R) range.
- Half of the group (or 12 million) actually saw their score increase.
- 8.5 million had a decrease in their score, but less than 20 points.
- 3.5 million experienced no significant change in their score.
- The majority of these consumers had low account balances and credit utilization ratios, significant credit history and for the most part no negative information on their reports.
- The average reduction in credit limit was found to be $5,100, more than double the reduction that FICO noted in a similar study for the period six months earlier. However, $5,100 was only 14% of this population’s average total revolving credit.
Additionally, the study concluded that consumers who max out their available credit limits by 70% or more are 20-50 times more likely to become delinquent on one or more credit accounts in the next several years. Consumers who maintained low balances, 10% of their credit limits and below, were the most creditworthy customers, confirming the generally accepted fact that credit utilization appears to be one of the most significant factors in predicting credit risk for the typical U.S. consumer.
A full report on the study is available on the FICO website.
What do you think readers, are you feeling better about those letters you’ve been getting reducing your credit limits? Has anyone really noticed a significant change in their score due to credit limit reductions? Share your story with a comment if so!
No related posts.
Great article! This is an issue that should be domestically addressed.
Frankly, I believe that the credit scoring systems are manipulated. Not to mention, it’s widely known that a large majority of people know that it is possible, and very easy to, manipulate our credit scoring systems using proven methods. Why is there such a huge market for credit repair, other than the obvious fact that the economy is in such bad shape? Is it not odd to anyone that one could pay a fee to a company and have their unfortunate irresponsibility erased? One of my relatives showed me proof of their credit score increasing substantially after signing up with Experian, with no other activity whatsoever anywhere else on their report.
So what do I think? I’m not exactly sure, but I know enough to confidently say that what is in place is not working and needs to be changed.
Bottom line: At the end of the day, it’s all about profits.
“Has anybody else noticed that there is some serious competition going on in the credit scoring arena, with a number of different scoring models vying for the business of determining who is creditworthy ?
Enough said.
Yes Christopher, no adverse actions, but how do you know their score simply didn’t go up by paying their bills on time?
Also, I find it surprising to say the least that FICO is claiming the average person’s credit score didn’t go down after an average reduction of $5,100 in available credit. that’s laughable at best… mine went down at least 5 points after a reduction of only $500! And I have a pretty decent credit score (700-710 depending who you ask, with no “credit repair” phenagling).
Thanks for speaking the truth!
Credit /Scores are a farce in this country. I live in Michigan. I pay my bills on time, Never pay late, nor do I pay the minimum, Yet after October 2008 The following occurred:
Creditors routinely called and offered me a payment holiday
Match any payment up to a specified amount and stop using the card
Some just lowered my credit line
another company routinely miss processes a telephone payment so that the payment charge back and fee will result in an over the limit status limit for that cycle claiming that the bank could not find the account-even though it is the same account I have used numerous times . Sure they refund fees, but claim that on the date the information was reported I was over the limited.
Another company closed my business card because of the market I lived in they changed the criteria,
(in other words I live in MI. even though I was never late etc. my business is not in distress etc.)
When the other creditors peak at your credit and see that your credit line has been reduced and you have gone over your limit they lower your limit. Now you are over utilizing your available credit so your score that was 700-719 is now 622-690.
In the mean time one company raised the interest rates on all of their customers. To 28.99 I was lucky I called in and was able to get them to manually review my perfect account they lowered 11.99 for 3 months. It is now 18.9. It is doubtful I would qualify for no fee balance transfer at this time.
My plan is to target my bills in a manner that best address My Fico score and write Congress.
This type of of activity is depraved. Tax payers bailed them out, in hopes of salvaging if not stimulating the economy. These types of preemptive strikes are crushing small business and impeding or ability to thrive less long sustain current levels of operation.
Sandra D 231-972-1602
8/29/10