When Good Credit Won’t Mean Squatby Tim Manni
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.