Overview
U.S. lenders have stepped up their efforts to control their risk exposure, including in some cases lowering the amount of revolving credit they make available to existing customers or closing their inactive card accounts. By itself that is not unusual since lenders traditionally have adjusted the amount of credit available to a customer who is demonstrating increased risk of nonpayment. What appears unusual in the current environment is adjustments by many lenders to the amount of credit available to customers whose credit reports do not contain recent indications of increased riskiness.
A leading measure of credit risk for lenders is the FICO credit score. The FICO score is a three-digit number summarizing the real-time information on a consumer’s credit bureau file, which rank orders consumers according to risk on a scale of 300-850®, where higher scores equate to lower future risk of default.
FICO continually conducts research and analysis to test and validate how well FICO scores effectively rank-order risk. As part of this research, we recently conducted a study to better understand the impact on FICO scores when lenders have reduced credit limits or closed revolving accounts of consumers whose credit reports contained no observable, recent indications of risk, or “risk triggers.” For this study, a risk trigger was a late payment, collections account or public record posted to the consumer’s credit bureau report between October 2008 and April 2009.
Information about a consumer’s credit debt remains very predictive and makes up approximately 30 percent of a typical consumer’s FICO credit score. Consumers who use a heavy proportion of credit available to them are substantially more likely to default on a credit obligation, compared to consumers whose accounts have low credit utilization levels.
It is important to note that lenders may also look for other kinds of information or behaviors that may indicate added risk. Such triggers might include: exceeding one’s credit card limit; excessive cash advances on credit cards; or overdrawing checking accounts or bouncing checks.
Lenders may also reduce the amount of their customers’ available revolving credit for reasons such as a desire to free up capital for use in other credit products, or to meet regulatory requirements.
Our study focused only on the impact to the FICO credit scores when we observed a reduction in credit card limits or closed revolving accounts of consumers who had no observable, recent risk triggers on their credit reports