Original Article written by Edward Jamison Esq. Edited by Robert Weinberg
Many people have never checked their credit score. They have always used credit wisely and have probably never been denied a loan. Long story short, they have never really had a good reason to worry about their credit score.
They do now.
Why? Because banks are systematically lowering credit limits on credit cards and HELOCS, even for borrowers with spotless credit records.
So when they receive notification from their bank of a drop in their available credit, they usually don’t think too much about it at first. They say to themselves that they had no plans to max out their credit cards anyway. And besides, they just got their HELOC as a financial safety net or they only used it to finance a new car at better rates with a nice tax deduction.
But what the banks aren’t telling them is the negative impact lowering their credit limits will have on their credit score.
As soon as a credit limit is lowered, it changes the Credit Utilization Rate, (CUR), which is a major component of a credit score. Credit Utilization Rates are calculated by dividing outstanding loan balances by the amount of credit available.
For example, if a borrower has $10,000 in credit card debt with an available credit limit of $40,000, their Credit Utilization Rate is 25%. But if their credit limit drops to $10,000, their CUR leaps to 100%.
The same thing happens when a bank freezes a HELOC.
As a result, millions of people who have never worried about their credit scores and who have spotless records are getting a rude surprise the next time they apply for a loan. (You may be one of them!)
That’s what Michael Isroff believes happened to him. He had a mortgage on his condominium in Chicago, plus a home equity line of credit with a balance of $12,000. This spring, National City froze his HELOC which had a credit limit of $100,000. National City wrote in a letter that Isroff wouldn’t be allowed to borrow any more against his home’s equity, and he would have to pay off the balance over time. In effect, his credit limit was reduced from $100,000 to the $12,000 that he owed.
Like most people, he didn’t think too much about it at the time because he didn’t really need it, it was just nice to have.
But when he went to refinance, his mortgage broker told him there was a problem. The best programs and rates were only available to borrowers with a credit score above 720 and he was two points short. He didn’t know it then, but his credit score dropped overnight from 760 to 718.
And he’s not alone.
There are millions of homeowners just like him who are going to need help repairing their credit to purchase a home, rent a decent apartment, buy a new car, get insurance, buy a cell phone or even just get a good job.
If you have been a victim of having your credit limits lowered or frozen, what can you do about it?
1) If you have any of your available credit reduced, challenge the lender on why they did it. In almost all cases, the reduction of credit is systematic and you MAY have been a victim of having your credit line(s) reduced un-necessisarily.
2) If you do not have luck having your credit limits reinstated, you will want to call the other lenders whom you have credit lines with and ask them for an increase in your credit lines to make up for what was reduced. Many times they can accomplish this without a credit pull, just based off of your payment history.
3) If neither of these suggestions work, you will want to work with a professional credit repair company to optimize all of the remaining accounts that you have and be sure everything on your credit report is completely accurate.
If you would like a complementary credit strategy session, or need a referral to a reliable credit repair company, call my office at 1-888-456-5635.
Debt & Finance Expert