Banks Behaving Badly and Your Credit Scores

February 6, 2009
by Edward Jamison, Esq.

“We are writing to advise you about a change being made to your account.” This prologue is a part of letters being sent to millions of U.S consumers and sets an ominous tone for the remainder of the communication. The “change” being referred to is either your credit card account has been closed or the credit limit has been severely slashed. In this particular example, the credit limit was lowered on a Barclay’s Bank credit card by $15,000.

In normal economic times a credit card issuer would only take such adverse action against one of their cardholders if they’ve done something wrong, such as miss a payment. However millions upon millions of cardholders are seeing their terms changed because of seemingly innocuous actions such as “a change in spending patterns” or “inactivity.” I guess we can attribute this to the fact that we’re not in normal economic times, but it’s not fair to consumers to leave it at that. Closing accounts and lowering credit limits can harm your FICO® credit scores. And since these actions are being taken against consumers who, in many cases, have fantastic credit scores the damage can be dramatic. Here’s what you can do…

Knock the dust off that old credit card – An inactive credit card, one that is open but never used, actually costs the credit card issuer money each month. Your account information is taking up space in their databases and they’re still likely buying credit scores on you each month trying to decide how to entice you to actually use the card. If you never use the card you are not generating merchant fees, or interchange fees, for the credit card issuer. And, obviously, if you’re not using the card you won’t have a balance rolling month over month so you’re not generating interest income for them either.

In many cases, now, the issuer is simply choosing to lose you as a customer by closing your account. You want to avoid this so you’ll have to appease them by generating a little bit of revenue. The good news is that it won’t come out of your pocket. Simply move the card to the front of your wallet and the next time you fill up your car or buy a pair of shoes, use that dusty credit card. This will reset the clock of activity and generated a little bit of income for the issuer. Pay off the bill when it shows up so you don’t pay any interest and repeat this strategy at least once per quarter.

Watch your spending patterns – This is a friendly way of your issuer telling you that you don’t have enough debt. For example, if you have a card with a $25,000 credit limit but have never charged more than a few hundred dollars in any month, and you pay it in full, then the issuer is questioning the need for such a high credit limit. They still have the risk of the “open-to-buy” (unused credit limit) so many have made the decision to adjust credit limits so they are more in line with your spending patterns.

Of course to avoid this you’d have to get into much more debt with that issuer, which could hurt your credit scores and cause other credit card issuers to take adverse actions too. If you’ve received a letter lowering your credit limits because of spending patterns there’s simply not much you can do other than be happy that they didn’t close the account, which would have been worse. Continue to use the card sparingly and think about opening a new card to help replace the lost credit limit. Eventually we’ll get back to the time when we can pay our credit cards on time and not have to worry about credit card issuers being scared of their customers, but for now you need to think outside of the box to prevent the bank from putting you outside of the vault!

Edward Jamison is a credit attorney based out of Los Angeles and is the founder of www.CreditCRM.com, a complete business opportunity that makes you the credit expert.