During 2009, credit card companies reacted to the turmoil in financial markets by slashing consumer credit lines by unprecedented amounts. Many consumers saw credit limits reduce to a mere $100 above their outstanding balances. This caused credit utilization ratios, a key factor in credit scoring, to shoot through the roof, dragging down credit scores to the floor.
Credit utilization is the second most important factor in determining credit scores, second only to payment history. It accounts for 30% of a person’s credit score and, when this ratio is high, can give the impression that a person is maxed out. (Credit utilization ratios are determined by dividing current current credit card balances by available credit.)
Last year, consumers with very good credit utilization ratios of 30-40% awoke to find that credit limit decreases has caused their ratios to skyrocket close to 100%. For example, a person with $3000 in outstanding credit card debt and $10,000 of available credit has a credit utilization ratio of 30%, a factor that would favorably impact their credit score. However, when $10,000 limits were cut to $3300 limits, the ratios shot up to 90%, making responsible borrowers appear to be on the precipice of running out of credit.
As a result of exponentially increasing credit utilization ratios, credit scores took a tumble, making it more expensive, not to mention more difficult, to get new credit card loans, reasonably priced card loans, or mortgages. Now that consumers have had the better part of a year to reduce outstanding balances, many who were shut out of the credit card market may be pleasantly surprised to find that their credit scores have returned to pre-credit cut levels. That is, of course, if balances have been paid down enough to reduce credit utilization to less than 50%.
Those who have made steps to reduce the percentage of their available credit will likely find that credit card companies that denied applications for 0% balance transfer credit cards six months ago may be willing to offer these low cost refinancing options to them. This, in turn, can help consumers reduce monthly interest payments and further improve their credit utilization ratios, as the addition of a new line of credit will serve to decrease credit utilization ratios further.
Consumers looking to learn more about their credit utilization can do so by visiting www.annualcreditreport.com, the only website that actually gives free credit reports without requiring a subscription. Using the data on these real free credit reports, a person simply needs to add up their credit card limits and balances and do a little simple math to determine if their credit utilization ratios are healthy.
Mary Vegliante
You May Be Interested In
- Multiple Credit Card Applications and the Impact on Credit Scores
- Student Credit Card Mistakes to Avoid
- Credit Card Options for Consumers with Bad Credit
In the competitive world of credit cards, each bank is trying to attract new customers by just about any means possible. Two of the primary tools they use to encourage [...]
As the fall semester begins, credit card companies will be focusing on acquiring new student credit card customers. Certain provisions of the CARD Act prevent these companies from setting up [...]
Prior to the credit crunch, many major banks offered “bad credit” credit cards. Since then, the number of credit cards available to consumers who fall into this category has dwindled [...]
August 22nd, 2010 at 10:21 pm
You reported this in January as though the practice had actually stopped, as if it were just a 2009 phenomena. Nothing could be further from the truth. Lowering of credit limits continues apace today (three-quarters into 2010) usually completely without any advance warning or notice.
August 23rd, 2010 at 7:57 am
Scott,
I think you may have stumbled on an older article. I have been writing about this all year and it remains the biggest credit card complaint in 2010.