The scariest part of the fall isn't Halloween this year; it's the meltdown of the financial world. And now credit cardholders are beginning to see the horror of it all.
Over the past few weeks, Bankrate readers have been telling us their tales of credit card limits slashed and cards canceled. And each of them has wondered what effect these moves will have on their credit scores.
Before we share their stories, we'll pass on the advice of an expert on FICO scores -- Craig Watts, the public affairs manager of Fair Isaac Corp. Here's what he wrote when asked what would happen to a cardholder's credit score if his or her credit limit was reduced:
"Reducing a credit card's limit or canceling an inactive card may have no effect on a person's FICO score or it may lower the score at least a little, but it likely won't improve the score. Any effect on a person's FICO score really depends on what other information is on the person's credit report. The simplest way to minimize any score change from either action -- reducing a card limit or canceling a card account -- is to keep balances low on all of your active credit cards. That doesn't mean paying off the balance due in full each month, although that's a wonderful habit by itself. It means keeping the amount low on the monthly bill received from the card issuer, because that's the balance that most card issuers report to the credit bureaus, who then post it on your credit report, where it becomes available for calculating FICO scores.
"So your readers' worry is resolved if they follow the three guidelines for getting a good FICO score: pay all bills on time, keep balances low on revolving accounts, and take on new credit only when you really need it."
Most of the readers who contacted us have been following that advice. They've played by the rules for managing their credit and they're still scorched in the credit bonfire. Read these credit card horror stories:
90 percent reduction
I received a Macy's Visa back in 2005 that I didn't even recall applying for. The credit limit was $5,000. Nevertheless, I didn't use it until this year. I had planned a trip to Disney in Florida and wanted to use it then. I called to activate it and found out that my limit was reduced to $500. How drastic was that?!
-- Patricia S.
Bruised credit scores
I am 49 years old and have been employed since 1993, when I graduated from law school. My wife and I have lived in the same home since 2000. Neither my wife nor I have any late payments on any obligation we have had over the last 10 years or more. We do, however, have a good deal of credit card debt, very nearly all of it at 4.99 percent interest or less. Our annual household income is over $90,000 and our total monthly debt payments, including my student loans, our credit cards and our mortgage, is about $2,400. My wife's credit score was about 720 and mine about 690.
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A few months ago, Bank of America advised rather abruptly that it was cutting our cards' credit lines by a total of about $30,000. This increased our credit utilization ratio rather dramatically, and it has begun affecting our credit scores. My wife's score has dropped by more than 50 points and mine by an even greater amount. In turn, I believe other credit issuers will begin cutting our credit limits. We just received notice from American Express, for example, that my wife's card limit through them will be cut by over $5,000. No doubt actions such as this will further depress our credit scores.
As a consequence of their actions, my wife and I are seriously considering severing our relationships with Bank of America and American Express. Although this sounds like the proverbial cutting off of one's nose to spite one's face, I don't know what else to do to express my displeasure with these companies other than discontinuing their opportunities to profit from my patronage.