12.14.2010

How Credit Card act negatively impacted credit scores

Is Your Credit Card Keeping You From Refinancing?

Excerpt:

In anticipation of the Credit Card Accountability, Responsibility and Disclosure Act passed last year, banks went on a credit pruning spree, cutting available credit lines on millions of borrowers, says Beverly Harzog of Cardratings.com, a consumer-education website. Last year, for example, American Express and J.P. Morgan Chase & Co. reduced credit lines for borrowers in areas hit hardest by the subprime mortgage collapse.

Reductions in available credit have a powerful impact on credit scores, says Ms. Harzog, causing them to plummet precipitously. Low credit scores can knock borrowers out of the refinancing race, as banks impose high closing costs on customers with less than pristine credit. Credit scores are partially determined by how much of available credit a borrower uses, otherwise called the "utilization rate."

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If homeowners are thinking about refinancing, they should pay close attention to their utilization rate. Pay down as much credit-card debt as you can, says Ms. Harzog—but don't permanently close out existing credit-card accounts, since that can also ding your credit score.

Comment: It's all about the credit "utilization rate". In a simple example, a couple have 1 credit card that had a credit limit of $ 15,000. They carried $ 3000 a month on their card. They utilized 20% of their credit. The CC company reduces their credit limit to $10,000. Well now they are utilizing 30% of their credit. Their FICO goes down and a refinance will cost more. The unintended consequence of the Credit Card Accountability, Responsibility and Disclosure Act.

We have a Discover card that we only use in a limited way. The credit limit is $ 13,500! I wanted to cancel the card. We've had this card for 20 years. I was going to cancel it, but if I did, my available credit would go down and so would my FICO score. Doesn't make sense to me!

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