For months, people have been complaining that their credit limits have been reduced, and wondering what the long term implications of that would be. Turns out - just as predicted, the FICO scoring model is not quite holding up to the changes in the credit card industry. As credit limits are reduced by banks (and not always at the fault of the cardholder), the debt utilization percentage increases for individuals and suddenly they wind up with lower credit scores.
One woman in Oregon complained to JPMorgan Chase & Co when they reduced her credit limit that it would hurt her 760 credit score. She claims the company said that wasn’t their problem - it was FICO’s problem to deal with. When her credit limit was reduced from $42,500 to $12,000, her debt in relation to the amount of available funds she had quadrupled. Since the debt utilization percentage is a large factor in how the FICO formula calculates someone’s credit score - she is concerned her lower score will cause problems if she should want credit in the future.
Approximately 30 million Americans have had credit limits reduced during the second half of 2008, according to estimates from FICO.
The biggest problem with this situation is that when banks reduce a consumer’s credit line based on the overall economy, it is not an accurate indication of whether or not that person is a higher risk for creditors to lend to. So when their FICO score is reduced, they’re labeled as higher risk for credit - increasing the interest rates they pay and making it harder to obtain credit.
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