As lenders close a record number of credit card accounts and slash credit lines, they're targeting an unlikely population: responsible borrowers.
A new study by Fair Isaac, the creator of the FICO credit score, shows that 11% of U.S. consumers, about 22 million people, had their lines cut or accounts closed even though they pay their bills on time and have good credit. This is more than double the 5%, or 10 million consumers, who had blemished credit and saw their lines reduced in that same period, the six months ended last October.
The findings are surprising because historically lenders have pulled back on credit for risky consumers, rather than those with good credit.
Yet lenders' definition of risk is changing as the economy spirals downward, says Josh Lauer, an assistant professor at the University of New Hampshire who is writing a book about credit reporting.
Lenders appear to be targeting high-credit-score borrowers for line reductions because they tend to use cards less and carry low balances, Fair Isaac's Careen Foster says.
This group also isn't terribly profitable for lenders because it pays few credit card fees, says John Ulzheimer, president of consumer education for Credit.com. Though these consumers are less likely to default, lenders still must set aside reserves in case the loans go bad.
When lenders close accounts or slash limits, it can increase the proportion of available credit consumers are using, which can hurt their credit scores and make it harder to get other loans. Generally, people who use a high proportion of credit are significantly more likely to default on loans than those who don't, Fair Isaac says. Available credit is a key component of the widely used FICO score, which ranges from 300 to the top rating of 850.
Fair Isaac's study, however, found that credit line reductions had minimal impact on responsible borrowers' scores. This may be partly because these borrowers had their available credit on cards cut by an average of only 5%, or $2,200. Scores may also be holding up because some consumers are "responding to economic conditions," Foster says, by taking actions such as reducing their debt loads.
Yet the economy has deteriorated sharply since the data were collected, Lauer notes, so the impact on scores may have changed.
As more lenders tighten up on credit, consumers can't afford to be complacent about their scores, Ulzheimer says. By the end of 2010, banks will slash $2.7 trillion of credit on cards, estimates bank analyst Meredith Whitney.
Fair Isaac says its analysis is ongoing. It plans to release additional findings in June.