Study Findings
Based on our study we have made the following observations.
- 14 percent of consumers affected — Recent FICO analysis shows that approximately 14 percent of the U.S. consumer credit population experienced a reduction in total revolving credit between April 2009 and October 2009 . This group breaks out as follows:
- 4 percent also had a risk trigger — a late payment, collections account or adverse public record — observable on their credit report during that period;
- 10 percent had no such new risk trigger observable on their credit report during that period.
- Lenders targeted higher scoring population — Our analysis of data from April 2009 and October 2009 shows that when the amount of available credit was reduced for people whose credit reports had no observable, recent risk triggers, the consumers affected already tended to be very low-risk. Their median FICO score was 757, and their card accounts typically had: a very low balance, low credit-utilization ratio, very few if any missed payments, and a long credit history. As a result, small reductions in total revolving credit had minimal effect on their FICO scores. [A score of 760 is generally considered to be a high FICO score, since the FICO score has a 300-850® range.]
- Credit utilization rate changed little — On average, the total revolving credit available to a borrower in this population (no risk triggers) was reduced by $4,800. That is approximately 12 percent of the average total revolving credit available to this population at the outset of the six-month period.
Little change was observed in the overall credit utilization rate for the impacted population. On average, their credit utilization rate increased from 24 percent to 27 percent between April and 2009 October 2009. This small change suggests that many people in this group were maintaining or reducing — not increasing — their credit card balances. Such credit behavior would help to minimize the impact to their FICO scores.
- Little impact to FICO scores — If we could hold all other conditions constant, we would expect that a reduction in available revolving credit would either have no impact on an individual’s FICO score or would cause it to decrease. In reality, the information on credit reports seldom stays fixed or constant. Our research shows that an individual’s score may go down, go up, or stay the same after the lender reduces a borrower’s credit limit or closes the account.
For the no-risk-triggers population, we observed very limited impact to their FICO scores following a reduction in available revolving credit. In fact, the median FICO score of this group increased slightly (from 755 to 757) over the six-month period. For the smaller population of people who experience a reduction in available revolving credit during the same period that negative triggers were reported to their credit reports, their scores tend to drop at least slightly in response to their own delinquent payments, the lenders actions, and other changes on their credit reports.
We also found the following:
- The median FICO score for the national population changed slightly between October 2008 and October 2009. (Based on Equifax data alone, the national median FICO score moved from 713 to 711 during that period.)
- FICO score movement occurred between April 2009 and October 2009 for the general population as well as for the no-risk-triggers segment who received a reduction in total revolving credit. For both populations:
- Some scores moved up, some moved down, and some remained constant.
- The majority of consumers had score changes of less than 20 points (up or down) during this period.
- Relatively few consumers experienced large score drops of 40 or more points.
- Despite experiencing a reduction in total revolving credit during the period, the overwhelminng majority (74%) of consumers in the no-risk-triggers segment remained within the same score band as before.. . Those who shifted to a neighboring score band were more likely to move upward (12%) than downward (8%). Thus, most consumers in this segment would have qualified for the same or better interest rates from lenders, based on FICO score alone
- Consumer actions drive lenders’ changes — Borrowers’ own actions drive, directly or indirectly, the credit history information which the FICO score uses to assess repayment risk. This information includes the level of indebtedness, the timeliness of repayment, and the frequency with which new credit obligations are assumed. The same borrower actions that contribute to a higher score also limit the potential triggers that can lead to lender actions such as reducing credit limits.
- Best recommendations for consumers — To help borrowers take actions that will lower their credit risk — and thus raise their credit score — we recommend that consumers should consistently:
- Pay all bills on time;
- Keep outstanding balances low on revolving credit accounts;
- Take on new credit obligations sparingly and only when really needed.