While You Were Sleeping Your Credit Score Dropped!

Old man snoozing in his chairI have a couple of clients that have credit score problems not of their own making. Seems that their credit card companies decided that they were no longer worthy of a $10,000 line of credit on their card even though they had never been late on a payment nor missed one. So their credit card company just up and sends them a notice one day that their limit had been lowered. What happened next was their credit score dropped which then raised the interest rate on their anticipated new mortgage thereby costing them literally thousands of dollars. Here’s how the math works.

Most of you probably know that your FICO score is a mixture of components, e.g., amount of credit, payment history, etc. In reality, your “credit score” is actually a “debt score” as it attempts to put a number on how wisely you use and pursue debt. Using our $10,000 figure above, we will say that you owned $2,500 on your credit card or putting it another way you were using 25% of your available line of credit. FICO scores generally say that a balance under 30% of the available credit line is normal.

That’s where the “catch 22” comes in.  When the card company lowered the available line of credit from $10,000 to $5,000, the percentage of credit being used jumped to 50%!  This resulted in their credit score being dropped 20-30 points. Now imagine if you had this happen to 2 or 3 of your cards at about the same time.  You could easily lose 100 points off of your score which then, in the eyes of a new lender, makes you a riskier borrower and thus raises the interest rate on your new mortgage.

Unfortunately, there is no easy cure for this problem. One thing you might do in this situation is call your other credit card companies and see if they will raise your limit. This results in a decrease of the percentage you are using of your credit line resulting in a rise in your credit score.

A good lender is used to working with these situations and can help you in obtaining the lowest interest rate possible on your new mortgage. We regularly recommend lenders that are aggressive in obtaining low interest rates for our clients.