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Credit score myths and inconsistencies

Posted on January 20th, 2009 – 3:27 PM
By John Ewoldt

My colleague Kara McGuire and I offered five things to look at when you’re evaluating your credit score on today’s Dollar Duo. But there are other pieces of advice that I’ve heard that are quite baffling. For example, you’re told not to close accounts or it may raise a red flag. This doesn’t mean you can never close an account, but it means you shouldn’t close more than one or two at a time. If you’ve got 30 unused credit cards, take it slow and close a couple a year.

I’ve heard that it’s bad to have balances on multiple credit cards. That’s true if you’re paying only the minimum payment and nearing your credit limit. If you pay off the balances on each card each month, it’s less of an issue or even a non-issue.

Having a lot of credit cards doesn’t hurt you either if you’re managing them successfully. In other words, you may have 25 charge cards and actively using two of them. As long as you’re paying on time, preferably paying the balance in full, it doesn’t matter that you have so many credit cards with zero balances.

I’ve also heard that if you’re buying a house, you need to clear any credit card debt. As long as the debt can be paid off in full if you had to, you’re fine.

Recently I’ve heard stories of companies such as American Express slashing a person’s credit limit because of where they shopped. I don’t know if that’s code for “Wal-Mart” but anyone out there getting your credit limit cut? If so, what reasons have you heard? �

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16 Responses to "Credit score myths and inconsistencies"

Jennifer Anderson says:

January 20th, 2009 at 4:36 pm

Wells Fargo cut my credit limit because they accidently gave limit increases to thousands of customers over a year ago and then just last month lowered my limit and said it was their fault and they would not allow consumers to keep their new limits even though I had maintained my payment history, even frequently paying off my balance each month. Im no longer a customer at Wells Fargo!

jules says:

January 20th, 2009 at 5:02 pm

I’ve had my limit cut due to inactivity! I paid off the card and haven’t used it in almost a year so they penalize me by lowering my credit limit.

Ted says:

January 20th, 2009 at 5:03 pm

No credit cut, but Chase (God Bless their greed-ridden hearts) decided to change my balance transfer agreement from 2004. You know, the one that was touted as 2.9% for life. The one that I’ve never been late on with a payment - the one from the customer who’s “money” for you, Chase.

Well, it’s now 7.9% - either that or I had to pay a $10 per month (per MONTH???) “service fee” as well as bumping my minimum payment to 5% of the outstanding balance.

Thanks Chase - bye forever Chase, you’re a real class act (that’s all sarcasm, except the “bye” part - you’ll never get my business again).

Dan Cupersmith says:

January 20th, 2009 at 5:04 pm

I have had 2 cards cut my limit within the last 4 months. Both card companies could not give me a good reason as to why they did it. The CS rep said that it was a computer generated decision. My credit score is +/- 5 points from when I established the cards. I think it has to do with the economy and how much exposures banks are willing to have right now. Both cards had zero balances, so I closed both.

Thom says:

January 20th, 2009 at 5:09 pm

Yup…AmEx cut the limit on my Blue card and stated in the letter that it was because of where I shopped. The letter explained something to the affect that too many of their customers who happened to shop at the same places I did were delinquent.

Morg says:

January 20th, 2009 at 5:10 pm

I had a Providian, nay, Washington Mutual, nay, Chase card that I kept a balance on for awhile, but then refinanced my auto loan and used equity to pay off the balance on a couple other accts. I then did not use the card for awhile. Soon I received notice that my credit limit was being reduced from $8,500 to $250. It wasn’t long after that they told me they were closing the acct. altogether. Then, they raised my interest on another acct. from 9.99% to 23.99 but left my $10,000 limit intact. I quickly transferred that balance to a new acct. and will have nothing more to do with Providian/WaMu/Chase or whatever they’re calling themselves this week.

Brian says:

January 20th, 2009 at 5:12 pm

Is it even possible to have a score that approaches 850, or anyone know someone who’s close? I got my score yesterday, and it was 801. I have some debt with a mortgage and a student loan, but haven’t missed a payment at all and any balances listed on my credit cards were due to timing….because I always pay my cards in full every month.

cooter says:

January 20th, 2009 at 5:18 pm

I had a best buy card and bought a small computer and put it on a best buy card and payed the payments on it on time and later when I checked the credit , here they said I was late more than 30 days six time and called to get the sitution resolved and they said to call best buy and they say to call the card issuer and they would not tell me who or what I need to contact and finally I did contact them they said to go screw myself basicly they would not remove them even though they admited they had computer errors , I think it is because I had closed the account already so they would not clear it up so have had to deal with it till they purged off the credit report…

Ryan says:

January 20th, 2009 at 5:31 pm

When times are bad, these business have to do what they can to maintain the appearance of good business for their best customers and I am sure are doing these changes to the best of you as a last resort. I run a small business that I operate in maybe 10-15 hours/week that I have to devote on the weekends and I raised my prices to dissuade customers from making lots of orders. So far, it’s worked.

But here’s my point. I am very far in debt. My FICA sat around 600 at the end of 2008. Since the 1st I have paid off three accounts. Does having past due/closed accounts hurt? Yes, but it looks very, very good to a creditor to see that you are paying off these accounts over the last 3, 6, or even 12 months.

Personally, I say dump the credit card companies, close all but the accounts “you need” (I’d love to have 1 card with a $500 limit to cover rental cars, nothing more) and stick it to them that way. Credit’s a pain, I know, we all need it, I know, but many of you out there are over extending yourselves and then putting up a stink that your getting screwed.

Can’t you put 1 and 1 together?

Tammy says:

January 20th, 2009 at 6:18 pm

I have had Washington Mutual cut my credit limit on three cards I had with them. They gave no undertstandable reason as to why, however I went from 2000.00 to 250.00 on one card. This card just happen to have a balance of around 800.00. They charged me overlimit fees until I paid the balance off because they cut my credit limit on the card. I closed all three accounts and paid off all three cards. I also had Sears cancel my card because I had not used it in like three years.

steve says:

January 20th, 2009 at 6:48 pm

First-credit card companies are cutting limits because of a couple factors A)They have to maintain a certain lending ratio per the govt. mandate. If their ratio is out of balance they either need more cash on hand or less credit available B) They randomly pull credit and if they see a change or you show too much debt they will cut it.

Too much of an open limit leaves the banks at risk that everybody may flood their card and the banks won’t have any money. Carrying a balance is okay, try and keep your balance below 25% on each card and in total. Pay $1 over minimum.

I don’t do loans but know many that do, I actually work with credit cards.

Second-The AMEX thing, they are lying, they just needed to do the above, same with inactivety.

Third-The 801 credit score it excellant, you should look at refinancing to consolidate, 30yr fixed are right around 4.5% now. I can recommend someone if you need stevenrcarver @ hotmail

Fourth–The late payments can be disputed by writing to the credit bureau, or explained to the lender if you are looking for a loan.

Macleod says:

January 20th, 2009 at 7:44 pm

Cutting your credit limit isn’t that big of a deal. Especially if you have a zero balance, why would you complain? However, my credit card company (a credit union) unilaterally raised Visa accounts from 8.9% to 10.9% with no reason. This is merely a money making scheme and a way to screw over your customers. I cancelled said card immediately and opened up an account with a new company.

John M. says:

January 20th, 2009 at 7:52 pm

Be very wary of anything a credit card company says and does. I own a National Company that does Attorney facilitated Credit Repair through an Association based membership. We see eroneous and unsubstantiated information on credit reports every day that we can get off the credit report. Problem is is that when a credit card company, or any creditor, reduces your limit, say a HELOC, it changes your ratios and as such, reduces your score. Credit scores are going down and the requirements for lending institutions are going up. If you need any help, please write me at MCS_memberservices@hotmail.com.

David M says:

January 21st, 2009 at 12:05 am

This is very poor advice - the person who wrote this column is doing you all a disservice by stating that you should slowly cancel your credit cards.

Never, never, NEVER cancel your credit cards! By doing so, you are eliminating one of the biggest factors in determining your credit worthiness, that being your credit history (35% of your credit score). If you eliminate your credit card, you will eliminate the history on the card, thus lowering your FICO score (and no, that doesn’t mean you can cancel your card and the derogatory marks go away – they remain regardless if you cancel your card or not - you just lose the history that was helping your score).

In addition to the already bad advice of canceling your credit card, if you want to achieve a better FICO score, then you will want to carry a small balance on your cards and pay some interest, not pay off the balance in full. Interest = better credit scores. That doesn’t mean you want to run up a huge amount of debt; however, if you maintain a 5% balance on your overall available credit, you will achieve better credit scores over time.

Also, credit card companies are not lowering scores because of the places you choose to shop! They lower limits for two reasons - #1, because of the economy, they are guarding themselves from people using too much unsecured credit that they could just walk away from. This year alone, we will have more bankruptcies than college graduates. The banks already are suffering from liquid problems (i.e. why they need bailout money), so they can’t overextend their risk by granting a lot of credit in uncertain times. The second reason banks lower limits is because they can automatically invoke higher interest rates on you because you now are automatically using more of your credit percentage wise (if you were using $500 of an available $2500, you would only be using 20% of your available credit. If they lower it to $500 credit limit, you are now maxed out, thus making you more risky which will then lead to an immediate FICO score drop to reflect the change).

Remember folks, credit scores were created for banks, not for consumers. What common sense says you should do will invariably hurt your FICO score in many instances. Be wary of taking advice from columnists who know next to nothing about credit scores as the only person who will lose is you!

For a great background piece that will give you a history on credit (and open your eyes), watch a special PBS did on the credit card industry:

http://www.pbs.org/wgbh/pages/frontline/shows/credit/view/main.html

Cheri Hagner says:

January 27th, 2009 at 2:14 pm

Yes, I had a Discover Card for 10 years with a very low limit, I used it once in a while, always paid on time, never late, and paid balance in full most of the time. This time I used some for Christmas, which was a mere $300.00 dollars which I was going to pay in full until they sent me a letter saying my limit had been reduced to $200.00 dollars amonth. So I called them, they told me my credit score wasn’t good enough and I told them they could suck up the $300.00 dollars or put the original agreement back in place. Have not heard from them, no news is good news and I really don’t care. This is not good business for anyone of us. They are not lending the credit in good faith, so they can keep it!!!

creditlook says:

February 18th, 2009 at 8:42 am

yup - too true. Here’s more info about Student Credit Cards