Credit Score Tips

5 Tips to Protect Your Credit Scores

Credit card companies are slashing credit limits, even for good customers, and that can slam your credit scores.  But a few simple steps can help preserve your credit.

Nearly half of banks have reduced customers’ credit limits, a recent Federal Reserve report says, and lenders aren’t done yet.  According to an article written by Liz Pullman Weston at MSN Money, card issuers will slash card limits by more than half in the coming months, from about $5 trillion down to $2.3 trillion by the end of next year.

Lower limits are a potential disaster for consumers’ credit scores because they change the all important credit utilization ratio.  Lenders like to see a wide gap between balances and credit limits; reduced limits narrow that gap, potentially damaging your scores, even if you pay your balances every month.  That’s because the balance used in credit-score calculations is typically the one from your last statement, before you sent in your payment.  A suddenly lower credit limit can make it look like you’re maxing out your card, even when you’re being responsible by paying in full.

Here’s what you need to know to protect yourself:

1. Diversify your credit
You may think all credit card issuers are alike, but they’re not. Their policies and business models differ, which is why some are slashing credit lines much faster and more broadly than others.  Having all your credit cards with a single issuer has created vulnerability to that lender’s whims, but these days, such loyalty could be devastating to your credit if all your accounts were reduced or frozen at once.

Diversify your credit accounts just as much as your investments.  In addition to cards from two or three major issuers, consider a card from your local credit union, which is member-owned and not as exposed to the credit crunch as major banks.

Don’t apply for this credit all at once because that can hurt your scores, too.  Spread your applications over several months, and don’t apply for new credit at all if you’re in the market for a major loan such as a mortgage or car loan.

2. Spread out your debt
Ideally, you’d pay your credit card in full every month.  If you’re carrying a balance, however, consider spreading it over several cards.  Carrying smaller balances on several cards is better for your scores than having a big balance on a single card.  If the limits are lowered on any of your cards, you can shift part of that balance to another account to lower your credit utilization.

3. Push back – If you have good credit
The better your scores, the more leverage you have with lenders, who are still eager to attract and retain low-risk customers.  Anyone with scores of 700 or more on the 300-to-850 FICO scale is generally considered to have good credit; scores of 750 or above mean you have excellent credit and can easily move your business elsewhere.  Point that out to the card issuer that’s trying to lower your limits.  If they won’t budge, follow through on the threat.

Sites like CardRatings.com, CreditCards.com, and LowCards.com can help you track down competing offers.

4. Lie low if you don’t have good credit
According to MSN Money’s Liz Pullian Weston, there have been horror stories about Bank of America customers having their accounts frozen or limits lowered after simply contacting the bank to ask for a lower rate or a balance transfer deal.  Ms. Weston notes that Bank of America’s spokeswoman indicated that it’s not a Bank of America policy to respond to customers’ requests for rate cuts by freezing accounts or lowering limits.  But Ms. Weston indicated that the spokeswoman stopped short of saying that calls from customers wouldn’t trigger closer scrutiny of their accounts, but that the bank was looking more closely at all of its accounts.

With lenders so eager to get rid of customers they perceive as risky, the best course if you don’t have good credit is not to draw attention to yourself.

5. Move your debt off your cards
Debt that’s on installment loans count against you less than debt on credit cards.  If your limits are slashed and your credit scores suffer, consider moving your balances to a personal loan (a credit union would be a good place to apply).  Or you can move it off your credit reports entirely by asking friends or family members for a loan to pay off your debt.

Riskier ideas: Moving the debt to a home equity line of credit or a 401(k) loan.  Both essentially “secures” the debt, making it impossible to erase in bankruptcy, and uses up precious wealth you might need later.  Furthermore, a 401(k) loan can become an inadvertent withdrawal if you lose your job and can’t pay the balance back quickly.  That means you have to pay taxes and penalties while you lose the future tax-deferred returns your money that could have been earned.

So consider these alternatives with great caution.  The idea is to make yourself less vulnerable, not more.

For more information on how to handle your budget and credit cards, or a consultation on tracking your spending visit www.anewhorizon.org or call A New Horizon, Credit Counseling Services, Inc. at 1-800-556-1548.

Source: Liz Pulliam Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "Your Credit Score: Your Money & What's at Stake." Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money.  http://articles.moneycentral.msn.com/Banking/YourCreditRating/5-tips-protect-your-credit-scores-now.aspx?page=2