September 1, 2009
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New FICO Study Gives Damage Report, Pt.3
How big is this; what about you?Starting with the big picture, the new FICO study indicates that between the months of October and April, approximately 33 million American credit card consumers had their credit limits slashed. Of those 33 million, about 24 million were surprised. They were all in good credit card standing, with no recent derogatory activity. They had played by the rules. Most had low balances and a long credit card history. Very few had missed any payments or had triggered any of the usual "risk flags".
Of this smaller group of well-behaved (24 million), over a third (8.5 million) took the direct hit. Their FICO scores did drop as a result. Within this subgroup, there were varying levels of damage. Of those not adversely affected, about 12 million credit card holders actually saw their FICO scores increase (weird). Another 3.5 million only experienced "negligible impact".
The 8.5 million, however, saw reductions in their FICO ratings of, as much as, 20 points. Depending where these credit card holders happened to be in the spectrum, most were vulnerable to falling below a FICO 700 score. These people could see the erosion of a domino effect over time as good credit card terms become more and more elusive in the future.
Called "Utilization Ratio", this is the measurement of the percentage of how much you could charge against how much you have charged. This key criterion carries about 30% of the weight of your FICO score. The only single category which carries that much weight (37%) is "missing payments". As far as the scoring goes, it doesn't even matter if you pay the full balance off every month. The snapshot is typically taken an on an undisclosed date each month. If your "U/R" is unhealthy, you can receive a derogatory on you credit report the following month which won’t easily go away.
Just a word to the wise:
<O> Owing 30% of your limit is considered the maximum safe limit for retaining a healthy FICO score.
<O> If you need to carry a large balance or make large purchases each month, endeavor to get your credit limit raised proportionately.
<O> Try to never be in a position where you can’t bring your balance down to this 30% threshold, should you be surprised by a sudden credit-limit cut.
<O> Maintain at least two different credit cards for use in case one goes sour on you.