Cut Credit Lines Don’t Really Lower Credit Scores

Cut credit lines aren’t impacting credit scores as much as some seem to think, according to a study by Fico.

The creator of the Fico score, which studied credit scores between April and October of 2008, found that 16 percent of U.S. consumers experienced a reduction in revolving credit during that time.

Of those consumers, 11 percent had no “risk trigger,” defined as a late payment, collection, or public record, while the remaining five percent did experience some kind of adverse event.

Fico found that in many cases card issuers cut credit limits unrelated to risk, such as to free up capital for use in other lending products and/or to meet regulatory requirements.

Those with no risk trigger typically had their credit lines cut as a result of inactive or low-balance credit card accounts, doing little to impact most consumers’ credit utilization rates.

In fact, lenders only cut an average of $2,200, representing approximately five percent of the average total revolving credit line for these consumers.

“For borrowers in the no-risk-triggers segment who received a reduction in total revolving credit, the median FICO score actually increased from 768 in April to 770 in October 2008,” Fico said in its report.

“Contributing to this positive score change were lender updates to their credit reports which reflected good credit habits such as paying bills on time, paying down revolving debt, and taking on new credit sparingly.”

“For the smaller population of people with recent negative triggers on their credit reports, their scores tended to drop at least slightly in response to the lenders’ actions, their own delinquent repayments, and other changes on their credit reports.”

So there you have it; if you continue to pay bills on time, keep balances low, and apply for new credit sparingly, you shouldn’t see any major credit score dings, even if a credit card issuer decides to slash your limit.

(photo: neubie)

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