The downward spiral of credit affects even those with great credit
There was a great article in USA Today of Saturday, March 7, 2009. In that article, the reporter advises that banks are now closing lines of credit and credit card accounts that are inactive. Even people who have been making their payments timely are seeing a reduction in the LOC that the bank will extend. This is having the unintended consequence of lowering one’s credit score. Like it or not, the FICO score is the most prevalent determinant in how much credit any grantor will give a consumer.
The Fair Issac company invented the FICO score back in the 1950s or so. It was founded by some mathematical geniuses who put together some models of how to predict one’s credit worthiness. They have done quite well ever since. Now, no one knows for sure what all exactly goes into the Fair Isaac credit score. We also don’t know how much weight is attributable to each factor. Fair Isaac keeps its methodologies as a closely guarded secret (who knows, may be they know the formula for Coka-cola, too). However, we do know that the size of the lines of credit, and the percentage that those lines are used at the end of each month, are factors in determining your line of credit. The more of your line that is used at the end of the month, the more deleterious effect it has on your credit score. For example, if you have used $10,000 of a $40,000 line of credit and that is outstanding at the end of the month, that is one thing. But if the bank has cut your available credit down to $20,000. You are now going to be reported as using half your available credit. By cutting your credit score, your ability to get future credit is diminished.
I am now genius, but then it does not take a genius to see that all of us are in an economic downward spiral if those who have been fortunate enough to avoid job loss and the other economic atrocities of this economy are financially affected. Whats the solution? Ha ha…that answer does require a genius.
I would advise that if you have any inactive LOC, go ahead and use it. Pay it off as soon as you can, but go ahead and use it. You do not want the bank to close your LOC for want of use. Secondly, if your bank has cut your LOC, call your bank and see if you can get it to reverse it decision. Explain that economic consequences to the bank and how it will affect your credit score. Be nice, but firm. Your bank should not be hurting a good and loyal customer in today’s market. These are rarities. Use your status as a rarity to make your bank return the favor.