How Can My Credit Score Drop When I’ve Done Nothing Wrong?
Your Credit Score in a Perfect Financial Storm
If you’ve been financially responsible, there are three factors that are forcing changes to your creditworthiness, and you’re not one of them:
- New regulations means that credit card companies have to keep larger reserves of cash, so they’re slashing credit limits and closing rarely used accounts. Both these actions can affect your credit score.
- Many lenders are introducing a new version of the most common credit-scoring model, and some consumers have found that alone has knocked 20 points off their credit score.
- People who’ve properly negotiated loan modifications may find that their credit score has been wrecked, even though they’ve acted responsibly.
You’re Not Alone
It may not be much consolation, but you’re not alone in suffering the effect of these changes. For example, USA Today reports that in the seven months ending April 30, 8.5 million Americans saw decreases in their credit scores as a result of their credit card limits being reduced or their credit card accounts being closed, even though they personally did nothing that changed their creditworthiness.
How Are Credit Scores Created?
Most credit card companies base their lending decisions on Fair Isaac Corporation (FICO) credit scores. This company developed and maintains the technologies behind this form of decision making. FICO 08 is the new version of the scoring system, which Fair Isaac says is more accurate, but which has brought about some drops in credit scores without any new “risk triggers.”
The three major credit bureaus, Equifax, Experian, and TransUnion, all use FICO to calculate credit scores, although they use different sources of data so you may have a different score with each one.
The best FICO score you can have is 850, and the lowest is 300. The magic number seems often to be 750. If your score is above that, then you should be able to access the best credit card and other finance deals.
Things May Be Getting Better
Many economists say the recession has ended, although some lagging indicators, including employment and mortgage arrears, are taking their time turning around. Credit card delinquencies, on the other hand, have been falling throughout the summer.
However, Reuters points out that some of this improvement may be a result of stricter lending policies by credit card issuers. The number of cards in circulation has been slashed by nearly a fifth over the last year, and credit limits have been reduced by more than $720 million. Meanwhile, 45 percent fewer new cards were issued in June 2009 than in the same month last year.
Life’s Not Fair
It seems unfair that many of those who have been financially cautious and responsible throughout their adult lives are now being denied the best interest rates, the best credit card deals, and appropriate credit limits. But banks and credit card companies love lending to those sorts of people, and the system is likely to correct itself soon. So it’s unlikely that you’ll suffer for long.
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