For several months, credit card companies have been cutting credit limits or canceling accounts due to difficult financial times and new federal laws slated to go into effect in the next few months. It has always been a fact that a if a consumer carrying a high debt load cancels an active credit account, it can have an adverse effect on the consumer’s credit score. Since many Americans are fighting to climb out of piles of personal and family debt and to improve their credit ratings the question is being asked as to what effect the actions of the credit card companies will have on the consumer’s credit score.
When a bank lowers a credit limit on an account that is carrying an ongoing balance, credit scores will significantly change negatively. Utilization of available credit, as a percentage, is a factor used in calculating a consumer’s credit score. In other words, if a consumer has an available credit limit of $12,000.00 and is carrying a credit card debt balance of $3,000.00 on that credit card, the consumer is assessed a utilization rate of 25%. If the credit limit on that account is reduced to $9,000.00, the same consumer now has a utilization rate of 33%. The utilization rate increases as the credit limit decreases. If the consumer has more than one credit card account the utilization rate for credit score purposes would be calculated using the total credit available on all credit cards combined and the total amount owed on all credit cards combined.
Keep in mind that there are other factors that have impact on the complete calculation of a credit score. Keeping payments up to date and out of debt collection, the length of time credit card accounts have been opened, past debt collection activity and bankruptcies all have impact on the credit score.
