Tighter credit card lending could cause scores to drop

CHICAGO – If you plan on waiting out the housing downturn, intending to buy a home when the coast is clear, you better start checking your credit reports. Some surprises may waiting for you.

Credit card companies are reducing limits on some borrowers. And for some people, that may cause a drag on their credit score.

Here’s why: A major factor in calculating a person’s credit score is credit utilization, said Barry Paperno, consumer operations manager for Fair Isaac’s myFICO division. When your total available credit shrinks, the percentage of credit being used goes up – and that has the potential to do some damage to your credit score.

“That will become a problem for some consumers, and it’s something that they need to be paying close attention to,” said Steve Ely, president of Equifax Personal Information Solutions. Equifax is a credit reporting agency.

A good credit score is necessary to get the best loan rates, and for more than a year now lenders have been requiring higher scores as mortgage underwriting standards tightened.

Credit card companies also are interested in controlling risk, and that’s why they’re reeling in credit limits, said Andrea Ayers, president of customer management for Convergys, a customer-service firm that works for credit companies.

If your credit limit is cut, it might be difficult today to change the lender’s mind.

“In past times, I might have said to call your creditor. But if they’ve taken that action to lower your limit, chances are not good that they will raise it,” Paperno said.

In addition to cutting limits, credit card companies have been making changes to interest rates and fees. They’re also reaching out earlier to borrowers when they have a missed payment, using a “soft touch” to help them create payment plans shortly after the due date has passed instead of waiting a month, Ayers said.

Granted, not everyone is seeing their credit disappear. To determine where to make changes, companies look at customers’ credit scores and their track record for paying bills on time, Paperno said. They also, however, base decisions on their experiences with people who have similar credit scores, he added.

If people with FICO scores of 710 or less have shown a higher pattern of risk lately, someone with a 700 score could very well be affected, he said.

Unfortunately, that creates the possibly of a “snowball effect,” which could push scores down even further, he said.

“Let’s say lender one reduces your limit because it’s tightening up on credit exposure. Your score drops,” he said. With that lower score, “lender two is going to lower your credit limit,” pushing your score down even more, he said.