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June 13th, 2009

When Good Credit Won’t Mean Squat

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Responsible credit card holders: consider yourselves warned. The credit card legislation that the president recently signed into law may not only take away your “free ride,” it may also lower your credit score.

The new rules will severely limit a credit card company’s ability to make big bucks off of negligent customers. That being understood, card companies have shifted their focus to responsible card holders:

Banks have cut off or pared back an estimated $1 trillion in credit lines since the peak of the credit boom, according to the now famously bearish analyst Meredith Whitney (who accurately predicted Citigroup’s meltdown back in 2007). Moreover, according to a study from the maker of the all-important FICO credit score, recent cutbacks have hit twice as many of the most financially responsible consumers–those with a median credit score of 770–as those with crummy credit.

Why? Because the formula for determining credit scores, which banks use to decide whether to give you a mortgage or any other loan, looks at something called your “utilization ratio,” the total amount of credit you use vs. the amount you have available. If you have $25,000 worth of available credit and you put $5,000 on your cards every month, your utilization ratio is a healthy, hey-I’m-living-within-my-means 20%. But cut down that credit line to $10,000 and suddenly your ratio jumps to 50%, making you look pretty overextended.

In the past, limiting credit lines was a measure usually reserved for more irresponsible card holders (being an irresponsible cardholder and having a low credit score usually go hand in hand). Now it seems as though good credit doesn’t mean squat.

Click here to learn some of the ways you can combat the new credit card rules.

We want to hear your opinions on the new legislation! Leave us a comment and remember to vote in our Market Trend poll “What sort of credit user are you?

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3 Responses to “When Good Credit Won’t Mean Squat”

  1. When Good Credit Won’t Mean Squat | Low Loan Refinancing Says: June 13th, 2009 at 12:13 pm

    [...] Originally posted here: When Good Credit Won’t Mean Squat [...]

  2. Mitch Says: June 15th, 2009 at 12:28 am

    I know someone who wrote on his blog that he felt FICO scores are about to be a thing of the past. I tend to agree, because banks aren’t giving out credit to anyone; when’s the last time you saw an envelope come in from a bank offering a new credit card?

    I don’t have any sympathy for the banks because their greed put us into a lot of this mess. My gripe, as you know, is that they didn’t make it begin sooner. Yeah, it may reduce some of our credit, as you’ve also seen where I griped about what two of my cards did to me, but so be it; I’d rather that than being totally taken advantage of by sneaky, underhanded tricks anymore.

  3. Tim Manni Says: June 15th, 2009 at 11:01 am

    Hey Mitch,

    Interesting observation about FICO scores. I think banks are looking at so many more indicators these days besides just FICO. Previously, I think as long as you had a decent FICO you were credit worthy. Banks are so much more protective these days that I think it’s much more than that.

    Perhaps I’m so negative on the new credit cards laws is b/c I’ve had a good history with my credit cards so far. I’m a little upset that my “free ride” may be over. Yet, hearing from other consumers, all it takes is one bad month for a great customer to turn ugly in their eyes. You could definitely argue that they have the ability to make a tough financial situation hell in a short matter of time.

    They make you walk a tight rope — there’s little room for error.

    Thanks Mitch,
    Tim

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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