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Cardholders suffer from ‘balance chasing’

By Brian Anderson
Published: Tuesday, July 27th, 2010

Successful business colleagues going through a document togetherThe credit card industry has been bugged by the recently developed suspicious practice that puts the cardholder at a very high risk of dropping their credit card score.

Coined as ‘balance chasing,’ this credit card industry practice prevents the credit score from going up even with constant payment. Upon the cardholder pay the debt load and thus lessening the balance, the issuer automatically lowers the credit limit. This reflects how much of the credit is being used, thus, putting the account in bad condition. This instinctively prevents the credit score from rising.

As the US recession came to its full blow few years ago, credit card companies also slashed the credit limit of most of the cardholders. Atty. Lauren Bowne of Consumers Union said that this situation is relatively short-termed and things are expected to level out the soonest time possible. Bowne added that one of the alternative ways to deal with the situation is for the cardholders to make large payments and if possible paying the debt in full.

According to FICO score, 35 percent of the calculation of the credit card score is based on payment history. Most lenders used the FICO system in determining the credibility of an applicant to loan and his ability to pay. Thus, being a responsible borrower counts a lot in aiming for a higher credit score. Apart from this, keeping low balances will also help in raising credit score. However, the loop is still something that both the consumers and the banking industry must pay attention to. Since credit utilization is still part of the amounts that were borrowed of the FICO system, it will reflect 30 percent of the credit score, making it the second most important component in the computation of scores. FICO spokesman Craig Watts said that the bearing for FICO scores of a deducted credit limit can change depending on the other factors that appear on the cardholder’s credit report. He further advised that a better way to solve the confusion is to directly ask the bank or lenders why there is a trimming of credit limit.

The newly amended Credit Card Act does not state in specific any prohibition against a card issuer who reduces the credit limit of a particular cardholder. Moreover, the act does not necessitate any formal written document explaining the deduction on the balance limit. Chi Chi Wu, a staff attorney with the National Consumer Law Center asserts that this practice is too unfriendly with the consumers. There are even worse cases where cardholder’s limit is reduced in below their outstanding balances leaving them to go over their card limits excluding the additional charges. Until the Credit Card Act provide consumers with proper protection from unwarranted practices like ‘balance chasing,’ unfair credit limit reduction is still expected to be experienced by most of the cardholders.

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