In 2008, many credit card holders were shocked to find their credit limits getting slashed so dramatically and that trend has only continued into 2009. There is a variety of reasons why credit limits have been getting reduced, including account inactivity but also because of changes to the credit risk profiles of so many cardholders that have changed as the direct result of the dramatic downturn in the economy.

Cards that have remained inactive for long periods of time were the first to go. Michael Riley, a software engineer from Denver and a long time customer of J.P. Morgan Chase, just received his second cancellation notice. “I just got a notice from Chase last week that my platinum card was being closed because of inactivity.” Riley hadn’t used the card for over a year but was miffed at the thought of losing an account that he had held for so long. “That was one of the first credit cards that I ever got right after college.” Many cardholders have shrugged off these account closures because most people don’t believe they will be affected by a card that they never use. Out of sight, out of mind, right? But another problem has emerged from these account closures that many people are unaware of.

These sudden account closures are also negatively affecting FICO scores for countless numbers of cardholders. FICO scores are computed utilizing several factors, including payment history, credit utilization, new credit accounts, types of credit being used, as well as the length of the credit histories. When an account is closed, it can dramatically affect the credit utilization score of a user. For instance, a cardholder with a $5,000 card balance on a $12,000 card limit and a zero balance on a $13,000 card limit has a total credit utilization ratio of 20%. But if the card issuer decides to close the account with the $13,000 limit because of “account inactivity”, that cardholder’s utilization ratio will jump up to 40% – in an instant. Credit utilization accounts for roughly 30% of the total FICO score so a jump in utilization from 20% to 40% can have a devastating impact on a credit score in a very short period of time.

“My credit score went from 785 to 668 in less than 90 days and I’ve never been late with a payment,” said Craig Woodside, a plumbing contractor in Trenton, New Jersey. “The only thing that changed in those 90 days was Citibank closing one of my old credit card accounts.” Another credit scoring factor that is negatively impacted by an account closure is the length of your credit history. Cardholders with accounts they have held since college, which are being closed for inactivity, wind up losing the entire credit history on that account. Some cardholders have had accounts closed with more than 20 years of credit history. With length of credit history accounting for about 15% of a total FICO score, these types of account closures, seemingly harmless at first glance, are really hurting people’s credit scores in a big way.

So, faced with the prospect of a drastic drop in credit scores, what can you do about this particular problem?

There are a few things that you can be proactive about in order to keep your account off of a card issuer’s chopping block. First, make sure that you maintain activity on the card, even if it’s just the bare minimum. You might consider setting up an auto-payment with the card for a utility bill, magazine or newspaper subscription that you know you’re going to have to pay each and every month. You don’t have to go out and overspend frivolously with the card (like so many people do with their rewards cards) – just keep the card active.

Next, make a preemptive call to your card issuer. Be sure to indicate your desire to maintain the account and ask if there’s anything that you need to be aware of (besides making your payments on time) or other things that you should be doing to keep your account in good standing. Make sure that the customer service representative notates your desire to keep the account in your file and be sure to indicate to the representative that you will maintain activity on the card.

And finally, if you haven’t started paying down those card balances just yet, now is the time to do it. Cardholders should aim for a credit utilization ratio of no greater than 30% on any individual card and in total. Paying down those card balances aggressively and driving your utilization ratios downward will have a significantly positive effect on your credit score in a short amount of time.

To register, go to http://www.ListClassAction.com or call 1-866-416-3470. You will need to choose from one of the following options -

• Six months of credit monitoring
• A cash payment (if money is available for distribution)
• Six months of credit monitoring and a potential cash payment
• Nine months of enhanced monitoring service (if you select this option, you can’t get any cash)

photo credit: tompagenet

Part of keeping your financial house in order is preventive maintenance / nipping things in the bud.  Small issues, left unchecked, can turn into big problems.  Case in point,  I spoke with an acquaintance over the weekend who wanted to pay me to ‘fix’ his credit.  Of course I declined because there’s no need to pay anyone to fix your credit.  There’s only so much ‘fixing’ that can be done and you can do that yourself, for free.

That said, I asked him what the problem was.  He let a number of small bills (under $100) go to collections.  They were all medical bills.  When I asked how the accounts went to collections, he stated that the insurance company had notified him that they didn’t cover the full cost of the procedures but he simply ignored all those notifications.  He felt the insurance company was in the wrong and should have covered the total costs.  However, he never bothered to communicate that to them or make arrangements with the doctor’s office.

As a result of failing to make a few phone calls, now he has several collection accounts on his credit report.  So now, his credit score has dropped and it’s going to take more than a few calls to get the issue resolved.   He’s found himself in a predicament that could have been very easily avoided.  Simply put, he let a molehill turn into a mountain.

Oftentimes, when you receive your credit report, there will be ‘reason codes’ or ‘action codes’ that define your risk factor. The following site explains the codes as well as what you can do to improve your credit rating for each of the codes received.

http://scottsecor.com/credit/pages/MC_reasons.html

• Make your payments late – Even one 30 day late payment can significantly reduce your credit score. Send in at least the minimum payment when you receive your credit card bill in order to avoid late payments. You can always make another payment during your billing cycle.
• Maxing out your cards – When you use more than 50% of the available credit on any one card, that tags you as a credit risk. You should strive to not carry a balance at all but if you do, make it less than 50% of your credit limit.
• Too many cards – While you do want to leave open the card with the longest history, there is no need to keep open every card you ever got. Take a look in your wallet and try to pare down to no more than three cards.
• Ignoring bills – If you have bills go into collections, that is a serious black mark on your credit. Whether it’s a $25 cell phone bill from college or an old store card with a $100 balance, be sure to pay all bills! If you think you’ve been billed incorrectly, call the creditor but don’t ignore it.