The FICO Score Problem – How it May Become Your Problem
Many of us have watched helplessly as our creditors started slashing our credit limits. Many banks and lenders began cutting credit limits in an attempt to avoid additional losses after the credit crisis took its grip on the economy. As a result, many of us saw our credit card limits being cut – often in half.
However inconvenient or irritating this may seem, it may actually be much, much worse.
Why?
Well, it all begins and ends with the FICO score model. Your FICO score is often directly related to your debt-to-income ratio. So, if your $20,000 credit limit is suddenly slashed to $10,000 then your open credit all of a sudden took a hit – and so did your FICO score.
The worst part, perhaps, of this whole FICO score mess is that many cardholders have seen their credit limits slashed simply because the creditor or bank was looking to avoid losses, not because of anything they did or didn’t do.
As credit limits continue to be cut (with many financial experts predicting that this will only get worse, given the new credit card legislation), many consumers are now watching as their FICO scores fall. In fact, FICO estimated that more than 30 million Americans saw their credit limits reduced in 2008 alone.
A lower FICO score, as many consumers already know, will make the consumer look like more of a credit risk. This, in turn, often means that their ability to secure a loan becomes more difficult, and that they will begin paying higher interest rates than their financial counterparts.
In other words, the FICO scoring system, at this time, may be quite an inaccurate way to gauge an individual’s credit risk.
Is there anything you can do?
Unlikely. You can certainly call your bank and plead your case; however, the credit reductions are usually set in stone and done across the board. The best thing we, as consumers, can do at this time is to keep available credit open, to not cancel any credit cards, and to pay down our balances on our existing credit cards and loans.
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