April 1,2009
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PIF vs. FICO vs. Lowered limit, Pt.2
Less isn't always more.If ‘A' is the FICO score, ‘B' is the credit card balance carried and ‘C' is reduction in credit limit, then we might expect that, with a good FICO score and a low balance carried, credit card limits won't be slashed. Didn't happen, here. Multi-colinearity. It turns out that carrying a balance is not all that linear. Finding the right balance is where it's at (double-meaning intended). For the FICO write-up, please refer to ("FICO ‘Gouge'; Good Stuff").
It turns out that those 22 million ‘good standing' credit card accounts (11% of the 200 million) had either low carried balances or no balances carried at all. The average FICO Score for this segment was 770 (which is very good). Since they weren't carrying meaningful balances, the credit card lender deemed that they didn't need all that credit and lowered it. (The fate is even worse for those who never charge, but that's another story). We don't know the debt-load of the 10 million (5%) with bad credit but, they likely carried high balances. Still, twice as many credit card accounts were nailed while having low balances.
Credit limits , of course, aren't the only good reason to carry a balance. When the interest rate is high it can get expensive. On the other hand, when interest rates are low, it may be wise to carry a balance and keep that cash in reserve or use it to a more financially savvy cause. Again, we're still talking about balancing resources here. I have a friend who always prided himself with never being in debt, struggled hard to pay it all off after a bad divorce and closed all the credit card accounts.
Then came the day when he was about to lose his quarter-million dollar home because he couldn't afford a lawyer. Even though he had an ‘open-and-shut case' to keep his home, he had no legal council for having insufficient cash and no credit. Immediately, I got him set up with two credit card accounts and now, he will be able to obtain legal council.
For some guidelines to determine when to carry a balance on a credit card, when to not and when a controlled balance is the best path, please continue on with the article series entitled: "Finding the Right Credit Card Balance ".