On Friday, FICO released the results of a study measuring the breadth of credit card limit reductions as well as the subsequent impact to consumer’s FICO credit scores. The study is the first of its kind since credit card issuers began to heavily ramp up their credit limit reduction activity in early 2008. Some highlights of the FICO study are;
1. 16% of the U.S population had their overall available revolving credit reduced between April and October of 2008. With credit bureau databases holding 200+ million consumer credit files this would seem to indicate that at least 32 million cardholders lost some of their credit limits during the study timeframe, which was April 2008 through October 2008.
2. 11% of the U.S population, or 22 million consumers, lost some of their credit limits for a reason other than risky credit activity such as making payments late, having accounts go to collections or having a negative public record added to their credit report during the study time frame. Credit card inactivity or low balances likely caused the lowered credit limits for this group. The median FICO score in this group is 770 so the adverse changes to their credit limits are not a result of poor credit risk.
3. 5% of the population, or 10 million consumers, saw their limits reduced because of some sort of risky credit activity including making payments late, having accounts go to collections or having a negative public record added to their credit report during the study time frame.
4. FICO scores remained relatively stable during the April – October time frame although there was significant score movement in 10% of the general population who received a credit limit decrease. A score decrease of at least 40 points occurred in 4% of that group and a score increase of at least 40 points occurred in 6% of that group. The score decrease is likely due, in part, to an increased credit utilization percentage while the score increase is likely due to the reduction of credit card balances.
Credit card utilization remains a very important factor in your FICO credit scores. According to the Minnesota-based credit score developer, “Credit utilization rate has proven to be extremely predictive of future repayment risk, so it is often an important factor in a person’s score” and “consumers who use a heavy proportion of credit available to them are substantially more likely to default on a credit obligation, compared to consumers whose accounts have low credit utilization levels.”
As always, consumers will earn better scores if they will make all of their payments on time, avoid other negative occurrences such as collections, keep their credit card balances low in proportion to their credit limits and shop for credit only when necessary. The target utilization percentage is, and has been for some time, less than 10%.
John Ulzheimer is the President of Consumer Education forCredit.com and a contributor to CNBC’s On The Money.