Credit-Card Issuers Have A Message For You: You're Not Special
Let's get something straight: no one is special. It doesn't matter what your FICO score is. Credit-card issuers are cutting credit limits and raising interest rates on even the most creditworthy customers. It looks as though John Ulzheimer, who used to work at Equifax and FICO, is finally having his CreditMattersBlog.com
moment. But I had mine in November when Citibank raised my interest rate. I thought I was special. I had an excellent credit score, too. But I quickly realized that it didn't matter. It was simply business -- and not personal.
Ulzheimer, in the video below, asks this: "what did I do to earn this insult -- this slap in the face?" Ulzheimer got his credit limit slashed from $25,000 to $11,500. That's the slap in the face that he's referring to. He received one of the Bank of America letters that I pointed to earlier this week.
This is the kind of letter that Ulzheimer received (click to enlarge):
In the video, Ulzheimer does a mock interview with a customer-service representative (being played by Carmen Wong Ulrich). He tries to find out what he did to warrant this kind of limit cut.
It sounds as though John is now on the prowl for a new card (he said that asking another lender for a limit increase isn't an option). Notice that he said his score would take a hit because of this limit cut. He says it's a fact. I disagree. And it's one of the things that I take umbrage with when it comes to most commentators and writers who say that a reduced credit limit will -- for a fact -- hurt a credit score. If you do not reduce your spending on the card that got hit, then your score may indeed take a hit. But it's not a fait accompli.
If John was previously using 7% of his limit, or $1,750, he'll need to reduce his spending to a level that preserves that 7% usage. That would mean he won't be able to spend more than $805 each month on the card. If he's able to do that, his utilization won't change a bit -- and his FICO score won't suffer at all.
Of course, FICO measures utilization in two ways. By individual card and overall. Assuming that John is not overutilizing his limits on other cards -- and I can assure you that he's not (his lowest FICO score is 809) -- he'll be fine there as well. Using my hypothetical, we're only talking about shuffling $945 in spending. My hypothetical also assumes that he has enough credit (elsewhere) to absorb that extra spending each month. I'd be shocked if he doesn't.
John may be looking for a new card, to replace the available credit that he lost, but I'm not sure why he'd even bother. Given the low utilization that I imagine he maintains each month, I don't see any need to replace it. All he'll end up doing is getting dinged for opening a new account (his average age of history will drop and he'll get a new inquiry). What's more, there is no guarantee that his new credit limit will be $13,500, which is what he lost over at Bank of America.
I would argue that John would be better served by shifting some of his spending to other cards that he already possesses.
That said, if it turns out that Ulzheimer's score will absolutely suffer because of the limit reduction (he'll know after he crunches the numbers), then it might make sense to start looking for a new card.
My point is this: A credit-limit reduction does not, for a fact, mean that your score will be hurt. You've got to do the math first. Figure it out before you start making moves.