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Credit Reduction Increases Credit Scores for 12 Million Consumers

By Sally Maison
Published: Monday, September 7th, 2009

Twelve million U.S. consumers saw an increase in their credit scores amid the widespread credit cuts and reduction of loan limits.

Credit Reduction Increases Credit Scores for 12 Million Consumers  In a recent study conducted by FICO, which developed a credit-scoring system, of the 33 million card holders – who were the subject of extensive cut, 12 million consumers claimed their scores have increased while about 8.5 million said their scores dropped to 20 points and no changes in the credit status for 3.5 million.

The remaining nine million consumers have tainted their records for late payments and other credit-related default. This information prompted the lenders and credit companies to pull-out credit extension.

Gerri Detweiler, a financial adviser at Credit.com, expressed surprise on the recent FICO study. She concluded that most consumers have managed their credit well.

From October 2008 to April this year, credit companies implemented a reduction credit limit – an average of $5,100 – in their consumer’s credit line.

The consumers who are affected by the reduction were contemplating on closing their credit accounts.

Craig Watts, FICO public affairs director, said closing credit account will not hurt the consumer’s credit score. However, the unpaid balance of closed credit account will reflect in credit report and eventually affecting their score.

Diane Worth, a card holder, commented that that the lenders and credit companies’ move on reducing credit limit may complicate their consumers’ scores through credit utilization. She said when banks or lending companies decided to close or limits the account, it eventually shrink available credit, resulting to bigger debts.

On the other hand, Joel Block, advisor and faculty member of the iLearningGlobal community, explained the effect of credit limit reduction to consumers. He said between October last year and April 2009, consumers have lost an average of $5,000 in their credit line, and naturally it also reduced the 30 percent allowable amount they can borrow. 

If the consumers already used the 30 percent allowable amount of the credit line originally extended to them, they will appear to be over extending their credit limit following the announcement from the banks or lenders that they have reduced their credit lines. As a result, the card holder may be marked as “risky.” This incident may go against the consumers’ credit scores.

While the bank and lending companies left the consumers with limited or no option, most financial advisers unanimously told the card holders that it is ideal to use only 10 to 20 percent of available credit. The sudden changes on banks or lenders’ credit policies, like the recent cut and credit reduction, will not critically affect the consumers’ scores.

It is also advisable not to cancel the unused credit card. It gives an impression to credit reporters that consumers can manage the debt well on those credit cards.

Paying bills on time is still the best practice to have strong credit scores.

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