Paying off multiple cards can lead to account reviews with unintended consequences
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO and consumer operations manager for Experian. He writes “Speaking of Credit,” a weekly reader Q&A column about credit scoring and rebuilding credit, for CreditCards.com. His writings about credit scoring have appeared on Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.
Ask Barry a question, or see if your question has already been answered in the Speaking of Credit answer archive.
Dear Speaking of Credit,
I recently had 16 unsecured/revolving credit cards. I paid off/closed six in December 2017. I carry a low/zero balance on 10.
Recently, I received letters from three accounts that my limit was greatly lowered. Two of these were at a zero balance and one has a balance that was paid down to only 10 percent of the limit. I am steadily (within the first quarter of 2018) going to zero out the 10 cards I still owe on.
I thought paying off and either leaving open or closing would show responsibility, but it seems like a punishment. My main goal is to get my score up.
My question is, should I close the accounts that have been involuntarily lowered? Should I just keep expecting letters of lower limits? – Shannon
With those recently lowered credit limits, you seem to have suffered the consequences of a common card company practice called “account review.”
Based on a combination of credit bureau information, credit scores and a card company’s own track record with a customer, the account review process helps lenders:
- Recognize excellent low-risk customers by raising credit limits and making promotional offers, such as 0-percent balance transfers.
- Stay a step ahead of cardholders heading for financial trouble by closing credit cards, lowering credit limits and allowing cards in poor standing to expire without renewing.
Credit items in account reviews
Account review not only considers a cardholder’s payment and charging history with that card issuer, but also the entire credit picture via credit report information and scores accessed on a frequent basis – often monthly – looking for such credit red flags as:
You’re no doubt familiar with credit bureau risk scores, such as FICO and VantageScore, that use credit bureau information to determine the likelihood that someone will pay all debts as agreed.
When ‘behavior scores’ enter account reviews
However, you may not be as familiar with “behavior scores.” These scores work in much the same way as credit bureau scores to measure creditworthiness, but they are based solely on an individual creditor’s own record of that customer’s account activity, which can include some payment and account balance history not found on a credit report.
Using credit bureau risk scores, behavior scores and credit report information together as part of account review can essentially provide the bank with a panoramic view of a customer’s credit profile, since:
- The behavior score is based on the detailed payment and charging history of a single account.
- The credit bureau risk score comes from all credit relationships appearing on a credit report.
Credit scoring reasons for lowered credit limits
Now let’s take a look at the role the two kinds of scores may have played in the lowering of those three credit limits.
- Credit score: Assuming a spotless payment history and no high-balance cards, you are likely to have had a good credit score of 700 or above for some time. This despite a high number of cards and number of cards with balances, which fortunately, only carry a small amount of scoring weight.
- Behavior score: Any slightly late payments that weren’t late enough to appear on your credit report coupled with some past high balances could have hurt this score at any of the banks that lowered your credit limits. Or, in the absence of such negative history, you could have a good behavior score as well a good credit bureau score – leaving other nonscore factors as the cause of the lowered limits .
When a high number of open card accounts plays against you
If both scores were good at the time of those lowered limits, the most likely source of the problem was information taken directly from your credit report. For example, prior to your recent payoffs, simply your high number of cards (open and closed) and the number of cards with balances could have led to those adverse actions by the card companies.
So, what exactly constitutes a high number of cards and cards with balances? While the major credit scoring companies, FICO and VantageScore, don’t divulge this information, FICO has shared with us that, on average, consumers with scores above 785 carry seven cards (both open and closed), only four of which carry a balance – less than half of what you have.
Benefits of paying off multiple card balances
As for what lies ahead, those six recent card payoffs should already be adding points to your credit score and helping your chances of preventing additional limit lowerings by any of your creditors.
Then, carrying out your plan to pay off the remaining 10 balances, while leaving them open and active, could provide additional help to both your credit score and behavior scores.
Tip: Paying off multiple balances will help boost your credit score, just make sure to keep those cards open – unless they carry costly annual fees. Closing existing credit cards could hurt your credit, as it could increase your overall credit utilization – the amount you have borrowed comnpared to your credit limits – and your length of credit history.
In fact, now that your credit report is soon to show only paid off cards with good payment histories, those card companies that lowered your limits could one day raise them again while begging you to accept a 0 percent interest balance transfer offer.
Hopefully, should that day come, it will be an offer you’ll have to refuse because you won’t owe any balances left to transfer.
See related: Banks’ internal “behavior scores” can decide cardholder terms, Payoff order for multiple cards: Which one first?
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