FICO Scores are Starting to Drop - But Why NOW?

Back on August 10, 2008 I wrote a blog post about the tightening credit and its ramifications and I ended the title of it with "...and Watch Your FICO Scores DROP!"

And it's begun to happen - I just don't understand why it didn't start sooner. When some of your available credit is taken away your ratio of outstanding debt to your available credit changes, for the worse. Whereas you may have had a credit card with a $10,000 credit line and only $2,500 owed on it you had a 25% debt ratio. If they reduced your credit line to $2,500 you would now have 100% debt ratio - not good for your FICO score.

I have monthly monitoring of my credit reports and score and have been surprised to not see any change at all to my FICO score even though as with many others I have had credit card companies reduce some of my credit lines.

But today I checked my daughter's report and saw her score dropped 28 points and yet not one thing has changed in her file since last month and surprise of surprise, last month it dropped 28 points as well! Absolutely nothing in her file had changed over those two months but her score has dropped almost 60 points. She has "excellent" in all the categories except for "length of credit history" because she's only got a few years of history.

I hadn't gotten my monthly notice on my account so I popped over there and lo and behold my FICO score is now beginning to drop as well.

What does this mean? Well, I'm not sure...it should have happened months ago when credit began being shut off, but it didn't.

But now suddenly the scores are adjusting downward. Odd isn't it? The government is pushing for the financial institutions that they gave bailout money to to actually use it to give credit to consumers again, but suddenly all of us don't look as good on paper any more - in some cases for no apparent reason. Are these institutions now going to point to our lower FICO scores and use it as an excuse not to lend?

Just what is going on? Seems like your guess is as good as mine, but it doesn't look good any way you look at it.

The Economy - Where Are We Headed?

If you've been reading my Blog you know I've been sounding the alarm about HELOC's being reduced or taken away and more recently credit card companies reducing credit lines arbitrarily whether you have a good payment history or not. And the amount of money that you make has absolutely nothing to do with the reductions in credit. As I said before, if you've been hit with this situation, check your FICO score because it will, most likely, take a hit as the "credit utilization" portion (a big one in the scoring) could go from 30% to 100% utilization, as it did for a friend.

The other day CNN reported on this situation, specifically with American Express admiting that they were reducing all credit lines. And today a friend just told me she was watching Suze Orman this morning and she was talking about this, also. She went so far as to say we are going back to a cash and carry society, that credit will be a thing of the past. I wonder how MC and VISA feel about that comment considering they just went public a short while ago and she's talking about their billlion dollar businesses disappearing!

So how will this all play out in the economy? Anyone with a crystal ball?

And Still More on Credit Card Credit Limits Being Reduced

Another person on my favorite Forum just got her AMEX card declined when she thought she had plenty of credit available. More on that tomorrow when she calls them.

And as I suggested, Automatic Payments are being affected - I just got a notice that a monthly charge I had set up with my AMEX card got declined. Since it is my "card of choice" (ha! not any more!) I know a bunch of other notices are going to start rolling in soon.

To add insult to injury I did find the letter they sent and not only did they reduce my credit limit, they also reduced my cash advance limit to $200.00! Are they kidding? And it is all based on how much credit I have outstanding, not on anything remotely connected to how much I make and can afford to carry in debt.

I have two kids in college with tuition just being paid, just spent $10,000 on my dog who collapsed and was diagnosed with cancer while we were 3,000 miles away, our daughter had an ambulance ride to the emergency room (another $5,000!) for a suspected kidney stone and I bought some furniture for a re-do of our home office. That ate up a lot of credit on my cards...does it mean anything? Just that I had a rash of unexpected or one-time expenses that got put on my cards while I re-grouped. Does it mean I'm suddenly going to stop paying my credit card bills, or be late with them?

This is a much bigger issue than it may appear on the surface. When FICO scores start reflecting this how will it affect people's ability to get a loan for a car, never mind a house? And as your FICO score drops more lenders will take notice and the cycle of reducing credit lines will extend even further. It's a vicious circle. "Round and round it goes, where it will stop, no one knows."

More On Credit Lines Being Reduced and The Ramifications

I've been on a Forum talking about this subject and got some interesting thoughts and comments.

A while ago I saw an article on this issue and here's a quote - the bigger (??) issue is what all of this does to your credit score, so take heed:

"Here's how that happens: Let's say a cardholder has a credit limit of $10,000 and a balance on the card of $4,000. The card company worries that large balance may increase the prospects for default, so it lowers the credit line to $5,000.

But in doing that, it completely changes what is known as the credit utilization rate, raising it from 40 percent to 80 percent. That is then factored into the calculation of one's so-called FICO credit score, which measures creditworthiness, according to Craig Watts, a spokesman for FICO-creator Fair Isaac Corp. "

Here's the link to the full article:
http://channels.isp.netscape.com/pf/story.jsp?flok=FF-APO-1310&idq=/ff/s..

So this situation is going to have far-reaching effects - and on people with good credit, not just people in over their heads. When everyone's FICO scores start dropping are they going to revise the scoring range????

And it may have an effect on businesses as well. If people's credit is shrinking they may not be able to buy the stuff they would have if they could have put it on their credit card and paid it off over a few months.

That also brings up questions as to what impact this will have on businesses? Someone brought up the question of what will happen to the Automatic Recurring Payments a lot of us have set up to pay for various monthly charges. I know I put a lot on my credit cards because I get mileage points. Plus if it's an internet vendor I think most people are more comfortable giving them a credit card to bill to than their banking information. And most aren't even set-up to do an Electronic Funds Transfer (EFT) from a checking account anyway.

What else can you think of that will be affected?

Credit is getting tighter, not just with mortgages

I received a letter yesterday from a Platinum credit card that I was a Charter Member of and have had for 17 years. Never been late with a payment, my FICO score is great and hasn't changed (I have it watched monthly) yet they are reducing my credit line by $1,240.00! Are they kidding? Then I did the math and realized that is approximately the amount of credit I have remaining on the line. So I'm sure it would have been even more had I not had most of my credit line used.

This is similar to what many banks have been doing with Home Equity Lines of Credit (HELOC). They are freezing them at what you already have out on them, or "rescinding" the entire line of credit if it is open without a balance.

This economy and credit crunch just keep getting worse. Do you have any stories?

First HELOC's, now Credit Card Limits are getting reduced! Watch your FICO scores DROP!

Well, now that people are getting their HELOC's rescinded (heard a horror story from my friend of a woman who was in the middle of a full kitchen remodel; totally torn down to studs then found her HELOC was yanked!)

The same friend was telling me that American Express just lowered his credit limit from $25,000 to $8,500! He's had it for 7 years, never been late, always paid it off in full. He called and tried to get it reinstated and they refused.

Just saw an article on it and here's a quote - the bigger (??) issue is what all of this does to your credit score, so take heed:

"Here's how that happens: Let's say a cardholder has a credit limit of $10,000 and a balance on the card of $4,000. The card company worries that large balance may increase the prospects for default, so it lowers the credit line to $5,000.

But in doing that, it completely changes what is known as the credit utilization rate, raising it from 40 percent to 80 percent. That is then factored into the calculation of one's so-called FICO credit score, which measures creditworthiness, according to Craig Watts, a spokesman for FICO-creator Fair Isaac Corp. "

Here's the link to the full article:

http://channels.isp.netscape.com/pf/story.jsp?flok=FF-APO-1310&idq=/ff/s...

I found it interesting that one of the banks that are doing this is Washington Mutual, already known to be pulling HELOC’s.

This situation is troubling on a number of levels. It seems like a fast-moving downward spiral that is going to have far, far reaching effects. e.g., I’m OK with holding my own right now, even holding non-cash flowing properties. But take away any of my credit and I could be in a very bad situation.

BTW, another friend got her $100,000 HELOC “rescinded” by National City Mortgage last week. She’s sick about it, mainly because she knew I had suggested taking it all out in putting it in an interest bearing account, just in case, but she didn’t act. She had another smaller one that she immediately took and put away.