Hi folks. Today I want to talk a little bit about credit scores and how they may be affected by the credit crunch we are experiencing. Lenn Harley wrote a post last week that touched down on some of this, titled “ANOTHER DRAG ON THE ECONOMY?? AN UNTOLD STORY. The loss of consumer credit.” If you haven’t read Lenn’s post please take a minute to do so.
Lenn’s post is about the effect of foreclosures, short sales, late payments, etc….on a person’s credit score and how this will affect their ability to get jobs, open bank accounts, buy cars, find affordable insurance and so forth. What her post doesn’t mention is the negative effect of credit scores for folks that do pay their bills on time.
Your credit score is based on several factors….including: paying debts on time, amount of debt AND available credit. The last one is the kicker. Having a couple of credit cards is a good thing. Owing more than 50% of the available credit is a bad thing.
Let’s say you have 3 credit cards with available credit of $60,000, but, because you are very good with your finances, you keep your total debt at about 25% or $15,000. This is a good thing. It shows you are able to manage credit in a responsible manner. Now let’s say you get your bills next month and the credit card companies have decided to “freeze” your credit at the amount owed or $15,000. You are now maxed out on your credit cards and your credit score will drop!!!
That’s right folks…..you have done everything right and your credit score has dropped because the credit market is in turmoil. Does this suck or what?