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FICO: Lower Card Limits Will Not Hurt Credit Scores

By Sally Maison
Published: Sunday, September 6th, 2009

Fair Isaac Company (FICO) says that consumers should not worry about cutoff in their credit limits since it will not hurt their credit scores. The company, which developed the most widely used credit system, says that only one third of 33 million people who incurred credit cutoffs experienced score reduction. A study conducted by FICO between October 2008 and April 2009 reveals that an average of $5,100 was reduced from the credit limits of these consumers. Last year, only 25 million people had their credit limits reduced during that same period.
 
FICO: Lower Card Limits Will Not Hurt Credit ScoresFortunately, more than 24 million people who had good credit records were not affected by the cutoff. These consumers carry low balances in their accounts, which is the main reason why their credit scores remain intact. In that group of 33 million, only 8.5 million people saw their credit scores drop. The reason: most have negative items in their credit records. Typically, these are unpaid bills and defaulted loans.

Many consumers initially worried that the cutoff on their limit will adversely affect their financial scores. This is because a part of this score is determined through the debt to credit ration. Higher limits and lower debt means a better score. Lower the credit limit and the credit ration drops. However, those who have good financial scores do not have to worry. Their scores are expected to remain intact despite the ongoing trend of credit limit reduction.

Financial specialists predict that more consumers will experience reduction in their limits before the year ends. They say that lending companies or creditors take this measure to maintain profit amidst new regulations in this industry. This is also a way of maintaining stability in this struggling economy. However, this should be no cause for concern to consumers who keep their balances low.

FICO recently studied 24 million consumers who have outstanding financial records. On a scale of 300 to 850, their average FICO credit score is 760. Their financials score drop was less than 20 after limits were slashed off.

Financial experts add that this is why having a good rating or score is important.  Consumers are advised to maintain good scores at all times. For those who have bad credit scores or ratings, it is not yet too late. Making prompt payments, keeping low balances, and avoiding unnecessary loans are just some of the easy ways to improve credit scores. Meeting with a financial advisor before making financial decisions can also help in maintaining a good and stable credit record amidst this recession.

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