No. In spite of rumors to the contrary, FICO has not changed its scoring system to bring credit scores down.
Credit scores are falling because of actions on the part of credit card issuers.
These lenders, in an effort to make more money while reducing risk, are lowering credit limits and raising interest rates. And it isn’t just the “risky” borrowers who are being singled out for this action.
In fact, prime targets are consumers who keep low balances, use their cards sparingly, and have few if any late payments.
For the banks, unused and under-used cards limit profitability, so they’re lowering credit limits to reflect the actual use of those cards. In some cases, they’re even lowering them to less than the balance owed – putting unsuspecting card holders over-limit and triggering penalty fees.
A recent survey by the Federal Reserve Board revealed that about 45% of all domestic card issuers are taking this step.
Unfortunately, this action on the part of just one card issuer will lower a consumer’s credit score – which can in turn trigger the same action on the part of other card issuers. As you can see, this is a trend that can snowball, causing a responsible card holder to see his or her credit scores falling like a rock.
The FICO scoring system bases 30% of the score on debt to available credit, and some financial experts are calling on FICO to amend this ratio due to the “no-fault” nature of these shrinking credit lines.
FICO, however, is not budging. They say that the consumers who have been affected by this arbitrary reduction in available credit are holding their own. They’re able to raise their scores fairly rapidly after the dip by paying off existing balances and discontinuing use of their credit cards.
Card holders can expect to see this trend continuing into mid-2010, when new regulations limiting card issuers actions will take effect.
Right now, they are able to change your credit limit and your interest rate for any reason – or for no reason. They can also change your payment date, causing you to receive your statement too late to make an on-time payment.
When the new regulations go into effect, card issuers will be required to give 45 days notice before making such changes, and will be prevented from increasing the interest rate on current balances. They’ll also have to send your statement 3 weeks before the due date and will be prevented from charging you a late fee if your payment was postmarked 7 days ahead of the due date.
In the meantime, do read every message that comes from your credit card company, do read your statement each time it arrives, and do go check your account on line before setting out to make a purchase. Your $10,000 credit limit on which you owe $560 may have shriveled to a $500 credit limit since your last statement. It’s best to learn that kind of news at home rather than when you’re standing at a check out counter.
If your card issuer has done this to you, you may be tempted to tell them to keep their darned card. But that’s not wise. Do transfer your balance to a friendlier lender, but keep the account open. Even with a lower credit limit, the credit it represents will help keep your credit score from falling even further.
