Brighten their holiday. Enrich their everyday.Give The Atlantic

58 Million Credit Card Accounts Cut In Just One Year

The Associated Press reports that a new study by credit score producer FICO says that 58 million credit card accounts had their credit limits reduced over the 12-month period ending last April. That's a lot of cutting. The cuts were mostly in the response to the new economic environment that banks saw themselves in thanks to the recession. Is this good news or bad news?

First, what's the effect it would have on credit score? AP reports:

The widespread cuts hurt about a third of consumers, but most people did not see a big impact on the credit scores, according to a study by FICO, the company that produces the most widely known credit scores. The limited effect may be because lenders often cut limits on cards that were unused or lightly used.

That might be part of the reason, but I would think that cutting limits should actually enhance the credit quality of most individuals. By having fewer cards or lower limits, you pose less of a risk to a new creditor. For example, imagine someone with an income of $50,000 and credit limit of $75,000 whose limit is slashed to only $25,000. Wouldn't you be more comfortable giving that person a loan after that limit was cut?

The article also notes the complaint:

About 73 percent of the group, or 24 million, had credit limits cut despite no new negative information in their files. Lenders may have used information not in credit reports to decide whose credit limits to cut, FICO spokesman Craig Watts said.

And that's smart. Even people who are good at paying their debts might have no choice but to go delinquent if they become unemployed for an extended period of time and burn through their savings. Past behavior is not necessarily an indication of future behavior when the economic equation changes so dramatically.

What are some of those possible attributes that banks used instead of those on credit reports? Back when I worked with lenders, they used a variety of sophisticated metrics that never appeared as contributing factors to credit scores. One such example could be zip code. If certain zip codes have been more adversely hit by the housing meltdown than others or have higher unemployment, then borrowers residing in the worst hit zip codes might be riskier.

I would expect to see this kind of behavior from banks continue as unemployment remains high. For credit cards in particular, the 12 months that follow this study could include even more dramatic changes for cardholders, given Congress' recent legislation meant to reshape the credit card industry. Some might lament Americans having less credit, but since too much credit started this mess in the first place, I think this is a positive trend for both banks and consumers. A little less credit could go a long way.