My Credit Score Went Down, Huh?
My Credit Score Went Down, Huh?
About 18 months ago we started to hear about American Express, Chase, and a few other major institutions starting to reduce limits or shut down credit cards on consumers. American Express was the first creditor to take an aggressive stance on protecting themselves from defaulted accounts at the consumers expense. Read below for a story from the mortgage world.
This client had been a great client for the mortgage broker, and was always concerned about working to improve his credit rating.
I read about a mortgage client of a loan officer who owned a business and used his Am Ex card to float a few accounts payable while he waited for receivables to arrive. He was applying for a $750,000 loan to purchase his wife’s dream home.
The day after he paid down the large balance of his Am Ex, they reduced the limit to $10,000. He was irritated to say the least, but he was about to be extremely upset when he was told that his credit score dropped 60 points. This cost him and his wife the dream home. His score was 710 prior to the credit score drop, and now with a 650 score he didn’t meet the minimum requirements of the 660 score.
It has become very important for all of us consumers to understand the creditor’s are trying to show their stockholders a return, and that has become very difficult in the recent economic climate, so they lean on these types of tactics to reduce their risk factor on future defaults. Is this hard for anyone else to comprehend? These are the same companies that use to raise your credit limit every month, and would load your mailbox with offers for new large cards.
This is happening to people that are behind due to job loss, layoff, or other financial hardship, but more surprising is that people that haven’t missed a payment or even were one day late. The current threshold is estimated at balances over 50% of the limit creates a red flag for the credit provide, and the metrics have freaked them out into seeing that the potential to default is there.
Most creditors wait until balances have been reduced to cut the limit. They are afraid to cut limits when there is a high balance since the credit card holder has a greater incentive to stop paying completely. There are those creditors who reduce the limit or even close the account when the balances are high.
Due to the credit to debt ratio, and the length of time you have had that credit account you must try to pay the account down or off depending on your available funds. You cannot afford here to let your emotions get the best of you here. The natural thing to do is to tell them where to put that card and cancel the account out. You must try to take the higher road to keep the anger you have, and call and speak to them. If that doesn’t fly KEEP THE ACCOUNT OPEN, DO NOT CLOSE IT OUT! Look for another way to pay it off or look to juggle debt to keep from paying the higher rate.
Until next time, use your credit responsibly and pay close attention to future posts, to make sure that you are on top of your credit. Please shoot me any questions you have, and I will do a post on it, as I am sure there are others with that same question.