Because lenders realize that available credit lines can be charged up quickly, it can be helpful to minimize the number of cards you have, says Bank of America. Indeed, your available credit on credit cards may impact a lender’s credit decision, Bank of America concludes. That’s the message that one of my readers recently received in his online secured-card statement from Bank of America. The message is reckless.Without more, a reader is left to his or her own devices. What is Bank of America suggesting here? Should the customer close all but one card? If the customer has $25,000 in available credit, should the customer reduce her available credit limit to $5,000? How much is too much? What’s more, just how will the lending decision be impacted? Will a customer with too much credit (no such thing, by the way) — and a perfect credit history — be denied new credit?To be sure, most (but not all) customers who have a secured card will fall into two camps: they’re either new to credit, and just establishing their credit history, or they are people who have had trouble in the past and are now reestablishing their credit with a secured card. In that light, perhaps Bank of America is sending a paternalistic message. Perhaps. Regardless, though, Bank of America’s message is incomplete. (As a side note, if any of my readers get this message in their regular credit-card statements, please let me know.)As long as FICO heavily weighs utilization into its scoring model, Bank of America’s message is irresponsible. Utilization accounts for 30% of the FICO score. If a customer takes Bank of America’s message literally, she could be setting herself up for a fall. Here’s why: if this customer slashes her own credit limits, by closing accounts, she will be left with very little maneuverability. (Another worry should be FICO 08, the new scoring model that’s getting rolled out soon. It penalizes consumers who have too few cards open (link here). Bank of America’s advice comes at the wrong time.)An example is in order. Pretend that a person has $25,000 in available credit. Imagine, moreover, that this person charges — on average — a combined $2,500 a month on all of the cards (always paying in full, though). For now, this customer is using just 10% of her available credit. For FICO-scoring purposes, this person will be rewarded for the low utilization (link here). Now let’s pretend that one of Bank of America’s customers takes the “too much credit can be bad” message and runs with it. The customer decides that $25,000 in available credit is too much. Because this customer charges $2,500 a month, she decides that a $5,000 limit will do the job just fine. Bolstered by Bank of America’s message, she calls her credit-card issuers (I would imagine that Bank of America hopes that she doesn’t close a Bank of America account) and requests that her cards be closed. She decides to leave just a single card intact. Now the trouble begins. Even though she only has $5,000 in available credit, our customer continues to charge $2,500 a month. Instead of having 10% utilization ($2,500 in purchases with $25,000 in available credit), she is now utilizing 50% of her available credit ($2,500 in purchases with just $5,000 in available credit). This customer, having taken Bank of America’s message to heart, has now gone from a great credit risk to a poor credit risk. What’s more, to reflect that higher risk, her FICO score tumbles (FICO would not take kindly to 50% utilization). With the lower FICO score, her only remaining creditor now decides that it must reprice her risk. Her interest rate gets lifted and her credit limit gets cut. Thanks, Bank of America. Confused, this customer decides to Google “closed credit cards FICO impact.” She peruses the first ten listings and sees an article from Bankrate.com (a popular personal-finance site). The title of the article is “Closing credit card dings credit score.” In it, she reads that Barry Paperno, Fair Isaac product support manager, says it’s a myth that having too much credit will hurt your score. “It’s just not true that you can have too much available credit. That by itself is never a negative with the score,” says Paperno. “Sometimes the things you do to get too much can be a problem, such as opening a bunch of new accounts, but for the most part, that’s just kind of an old wives’ tale.” (Read the entire Bankrate.com article here.)Upset, the customer opens the Bank of America statement again. Damn, she wonders, did Bank of America mean that I shouldn’t run out and get a bunch of new cards? Or was Bank of America really suggesting that I close several of my credit cards? Now that I have 50% utilization, should I even worry about getting approved for new cards? Will banks be willing to lend to me with my FICO score down 45 points? Bank of America’s message just wasn’t explicit enough, our customer concludes. On a mission to figure this out, this person does another Google search. This time she searches for “Too Many Credit Card Accounts.” Within the first ten listings, she finds an article that’s entitled: Too Many Credit Card Accounts — Bad News? (story link). The author of the article (a great guy, by the way) argues that having no options is a heck of a lot worse than having several accounts. The article says that “Mom and dad were well intentioned when they gave us tidbits about credit — but when it comes to credit cards, they missed the boat when they told us that having just one or two cards was all that we’d ever need. Tell that to the guy who only has one card and no options — and very little available credit. If you ask me, that’s the person who is playing dangerously.” Listen. I understand that the credit environment has changed. But Bank of America is doing a disservice to its customers when it includes a three-sentence paragraph that is vague. It’s an open-ended message that can be taken several ways. What’s more, it leaves the customer guessing. If Bank of America felt the need to warn its customers about available credit, it should have explained itself. It should have explained that FICO scoring is still important. It should have said that utilization is the second-most important factor when it comes to scoring. It should have said that there are plenty of people out there with a tremendous amount of available credit — who manage their credit cards perfectly — and who never worry about being denied for new credit. It shouldn’t have left the job to me.
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