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How Bank Of America Froze My Credit Line And Impacted My Credit Score
Bank of America froze my credit line in 2010 despite my perfect payment history and credit score well above 720. It had nothing to do with me and everything to do with the bank's rash efforts to lower the amount of credit that its customers could access. The bank has an obligation to manage its risk, but was there an unintended consequence to the credit scores of the affected customers like me?
National Association of Realtors Complaint I read about how the National Association of Realtors (NAR) was complaining that credit line reductions were harming innocent consumers who had perfect payment history. The first thought that came to my mind was that NAR represents a hurting industry and needs as many consumers as possible to be qualified to purchase and finance a home. Not exactly the most objective source of information. But do they have a point?
Credit scores are primarily driven by your payment history and how much of the available credit you're using. These are both proven, accurate predictors of a consumer's likelihood of defaulting on a debt.
But what about consumers who already have high credit scores? Will reductions of their credit line hurt their score? FICO researched this topic and the results may surprise you at first, but make sense once you think about it.
If You Already Have Good Credit First, ask yourself why someone has a high credit score. For the most part, it's because they have near perfect payment histories and they have a low credit utilization rate. In other words, people with high credit scores who have a $10,000 Mastercard either pay their credit card in full each month or carry a small balance that is $1,500 or less. If their credit line is reduced, even by 50%, their credit utilization rate is still very low and their perfect payment history still plays a major role in their credit score.
The results of FICO's research indicate that credit limit reductions have negligible affect on high credit scores and that a small percentage of consumers may experience a credit score drop, but less than 20 points.
For Those Of You With Lower Credit Scores Let's flip that coin. For someone that already has a weak credit score (620 or less), ask yourself how their credit score got there. The most likely answer is that they have a series of late payments and they also tend to carry balances month to month that represent a high credit utilization rate (50% or more). So, when their $10,000 credit limit is reduced and they already had $5,000 in debt, their utilization ratio gets very high.
In fact, FICO reports that consumers who use 70 percent or more of their available credit card limits were found to be 20 to 50 times more likely to become delinquent on their debt within 24 months!
The Final Answer So, do credit line cuts impact your credit score? The answer is it depends. If you already have a strong credit history, the impact is minimal.
If you already have sketchy credit, your credit score will take more of a hit. Despite the cries from groups like NAR who want to help their members sell more houses, the system is working just as it was designed.
Author Resource:-
Nathan Randall, editor, Daily Dollar Newsletter provides free daily advice on money matters plus coupons and discount codes. FYI...you can now access the Daily Dollar Newsletter via iTunes podcast, YouTube video, and on Facebook and Twitter too.
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