How Balance Chasing Hurts Consumers

Your credit score is based largely on the ratio between the balance you maintain (if any) and the credit limit you have. Anytime your balances on unsecured credit (not car loans or mortgages) exceed about 30% of your available credit limit, the impact will be negative. If you can bring balances under 30%, your score will slowly improve each month.

Lately, banks and credit card issuers have been doing something very disturbing called "balance chasing". As you pay down a balance, they will reduce your credit limit. They also may reduce your limit under your current balance, or to an amount within a few dollars of your current balance.

Aside from reducing your available credit, the action has a very negative impact on your credit score as it can change that ratio instantly from a healthy under 30% figure to something much higher, if not 100%.

For example, our son had strong credit and was maintaining his balances around the recommended 30% of his credit limit. With one card with Wells Fargo, he had a balance of about $2600 with a credit limit of $10,000. With no warning, they cut his credit limit to $3000. So suddenly, as it appeared to the credit rating bureaus, he was now using 87% of his available credit. Within a month, his credit rating took a hit.

After that another card, a Lufthansa Airlines branded card from Barclay's did the same thing, reducing his limit to within a few hundred dollars of his balance, changing his ratio of used credit from under 30% to over 80%. It can become a vicious cycle, as each time this happens, it negatively impacts your credit score, which can cause other lenders to do the same thing, and so on.

The move comes as banks try to limit their risks. They seem to be taking actions like this with anyone with a credit score under 720. They seem to fear that even though you have a low balance, compared to your available credit, that you could easily get into trouble. They also seem to take the action against slow payers, people who run up their balance and then just pay the minimum each month. These are also the people the banks make the most money from, as they pay the most interest.

While I agree people do not necessarily need large lines of unused credit, the problem is the way the credit scoring system using that ratio of balance to limit to prepare a credit score. With all the new credit card regulation, I would have like to seen this issue covered and consumers better protected from the impact of these seemingly arbitrary decisions.

With so many things in life now related to your credit score, whether buying a house or car, getting a job or even renting an apartment, it should not be possible for credit scores to be impacted, even if a balance is reduced.

It also costs consumers money. We recently moved to Los Angeles and rented an apartment. Because our credit score was very strong, our security deposit was only $300. Had our score been poor, the deposit would have been $2500, an enormous difference.

Kimberly Palmer "How To Deal With Balance Chasers" US News & World Report Money via money.usnews.com

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