The Color of Money: Smaller Credit Lines Shouldn't Hurt Scores Much

By Michelle Singletary
Thursday, August 27, 2009

Consumers across the country have been getting letters from their credit card issuers announcing deep cuts in their credit lines.

But not to worry, says a new study by FICO (formerly known as Fair Isaac), the creator of the widely used credit-scoring system. If you don't carry a high balance and you pay off your balance every month, the cuts might hurt your feelings but will have minimal impact on your FICO scores.

"Our study suggests that lenders are using a scalpel and not a hatchet to trim their revolving credit exposure," said Mark Greene, chief executive of FICO.

FICO found that about one in five consumers had their credit lines reduced. In all, between October 2008 and April of this year, the available revolving credit was sliced for an estimated 33 million U.S. cardholders. That was up from an estimated 25 million cardholders between April 2008 and October 2008. The average reduction was $5,100.

In the latest sampling of the 33 million who had their credit limits reduced, researchers found that the credit reports for nearly 9 million people contained recent negative credit dings such as late payments. It was such information that may have prompted lenders to reduce those customers' limits.

Ah, but you may be inclined to say those folks got what they deserved. So what about the good users with no reported negative information in their credit files?

FICO found that 24 million cardholders whose limits were cut did not have any new negative information in their files. In fact, this group had a median FICO credit score of 760, on the scoring model's 300-850 score range. For the 24 million, this is what happened to their scores after their limits were reduced:

-- 12 million had an increase in their scores after their credit line had been lowered.

-- Of another 8.5 million cardholders, most saw their typical scores drop 20 points or less.

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