As we’ve said before, these are not usual times.  While the credit scoring formula remains pretty much the same, based on five distinct components, the financial industry has changed drastically.  Therefore, credit building information is subject to the whims of the credit card companies and their reactions to the current financial market and to the new government regulations.

One of our clients had a great question this week about his credit card account.  It is a 4-year-old Visa with a $50,000 credit limit at a regional bank where he has several deposit and loan accounts.  He is an established customer with a perfect payment history at this bank.  His current balance is about $22,000, less than half of the credit limit.   He is considering paying it off in full as he has the money to do so and will save several hundred dollars in interest, even with it at a single-digit rate. 

However, he has heard that credit card companies are lowering credit limits if you pay off the account and he is weighing the financial savings of full payment along with the credit score impact of paying it off and the possible lower limit on the account.

Sound familiar??  We have heard from so many people, with great payment history on long-standing accounts who are suddenly notified that the credit limit has been lowered to their existing balance, drastically cut if there is no current balance, or just outright closed for a variety of reasons.

It is frustrating, annoying and sometimes financially devastating, particularly for those small business owners that rely on their personal credit accounts to run their business.  So what to do?

Understand your credit score.  Yes, paying down revolving account balances to less than 25% of the account credit limit generally has a positive impact on credit scores.   NOTE: This does not usually happen the day you make the payment due to credit reporting lag time.

Read your statements each month and review the notices the credit card companies send you.  You may not realize the credit limit on your MasterCard has been lowered until you look at the statement.  Yes, they are reducing credit limits down to current balances.  When this happens it is impossible to get below the 25% utilization ratio unless the account is paid off in full.  Example: A $5000 credit card account with a $4000 balance gives an 80% utilization ratio, probably hurting credit scores.  Making a $3000 payment leaves a $1000 balance and a 20% utilization ratio, a boost to scores.  However if the credit card company immediately lowers the credit limit to $1000, you have a 100% utilization ratio, essentially a maxed out card – devastating to credit scores.

You also want to read the fine print on “changes to your account” type statements you receive.  They often give the opportunity to ‘opt-out’ of interest rate increases although they usually require that the account be closed if you won’t accept the new, higher rate.  Knowing your overall account totals, types of accounts, and their collective credit histories should be an important part of your decision to accept or decline the new terms, along with your personal budget considerations, of course.

Request a reinstatement.  If your 10 year old Visa was closed and you never were late on the payments and the balance was zero or very low, contact the company for a reinstatement consideration.  Ask to go up the chain of command to get to someone who can make the decision to reopen the account or undo the credit limit decrease.  Have your list of reasons ready to support your request: how long you’ve had the account, how often you use it, the highest balance ever was only ___% of the entire account limit, etc.  When they agree, GET IT IN WRITING.

Back to our client and his specific question.  Yes, he runs the risk of them lowering the credit limit if he pays it off entirely.  However, that could happen anyway, whether he pays it off right now or not.  And the fact that they have not lowered it yet is a pretty good sign.  Additionally, the money he will save makes sense to his personal financial picture and even if the credit limit is lowered, a zero balance gives him 0% utilization ratio, a very positive aspect for the second largest part of his score.  So he’s going to pay it off.

It’s been said recently that “the credit pendulum is stuck at stupid” because of the extreme reactions the lending industry is taking toward consumers.  Eventually, it will come back to some sort of middle ground that factors reason and customer service into lending decisions.  In the meantime, we all need to be informed, learn as much as we can about our own finances and credit to assure that we are watching out for ourselves during these “not usual” times.

You can get your own Credit Check-Up for only $100 to find out what you can do to positively impact all five parts of your credit score.  Contact us today for more information.

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