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November 28, 2010

How can you avoid this damage to your credit score?

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Category: Home Buyers, Home Sellers, Owning a Home


Just when you think you have done every thing you can to keep your credit score healthy, here comes another way to take a major ding.

If you’ve been paying attention at all, you’ve probably read about the credit score hits as a result of credit card issuers reducing credit limits or cancelling unused cards.  The reason that this impacts your credit score is that it changes your utilization rate, the ratio of available credit to credit used.

You may be handling your credit responsibly by keeping an extra credit card in reserve for an emergency, paying regularly on the three you are using, and making your mortgage and car payments on time.  You are even paying as agreed on your home equity line of credit and you have a credit score around 750.

All of a sudden you get a notice from the equity line issuer that your available credit has been cut in half due to “market conditions.”  That’s followed by a letter from your credit card issuer cutting your credit limit from $15,000 to $7,500.  Meanwhile, you have a balance of over $7,000.

What’s that do to your credit score?  Shouldn’t be affected at all, should it?  You’ve paid on time, you aren’t over limits on anything.  Unfortunately, the impact is larger than you may realize.  Depending on circumstances, these bank cuts could send your credit score down into the upper 600’s.

A credit score in the upper 600’s may be too low to allow you to refinance or even prevent you from getting a mortgage if you wanted to move.  There’s not really anything you can do about it at this time.  Up until now, you just have to accept that this is the way Fair Issac says it’s going to be.

The National Association of REALTORS® (NAR) with over 1.1 million members, has decided that this is wrong and worth fighting to change.  They have demanded that Fair Issac take immediate steps to lessen the impact on customers when banks have eliminated or slashed credit limits of customers in good standing.

Fair Issac says that 30% of the FICO score is based on the customer’s available credit and utilization rates because they are accurate predictions of future problems.

If you  want to read more on this story check out this article.

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