Falling FICO Credit Scores: Here’s Why Your Credit Rating is Tanking

Recent reports of falling FICO credit scores is not surprising in light of high unemployment rates, stagnant real estate markets, and ongoing home foreclosures. Unfortunately, other factors can lower your credit scores even if you’re paying your bills on time, haven’t lost your job, and aren’t in foreclosure.

• Credit utilization ratio: You can calculate this number by dividing the amount of debt you owe by the amount of credit you have. If you owe $3000 between three cards that have a combined total credit line of $10,000, your credit utilization ratio is 30%. Financial advisors recommend keeping your balances at about one third of your available credit, or about 33%. Unfortunately, if credit card issuers cut your credit lines, your credit score can decrease.

• Credit card issuers cutting credit lines: The days of carrying a wallet full of credit cards with five-figure credit lines are gone. Credit card companies are reducing credit lines to limit their risk. In the example above, owing $3000 against $10,000 total credit lines would put you in good shape, but if your total credit line is reduced to $5000, owing $3000 would increase your credit utilization ratio to 66.6%, which is well over the recommended utilization level of 33% or less.

• Unemployment: As high unemployment rates linger, more consumers find it necessary to make minimum credit card payments and may also increase balances using credit cards for essential expenses. Missing payments can take a big bite out of your credit scores very quickly.

• Sluggish housing markets: This can cause problems for homeowners who need to sell their homes to relocate to a new job or for those who can no longer make payments. If you can’t sell your home, or your lender won’t approve a short sale, you may be forced into foreclosure. Contact a housing counselor for help to avoid foreclosure.

• Reduced income: Taking lower paying jobs while waiting for your next professional gig can help pay the bills, but if you fall short, using credit cards can seem like a temporary “bridge” to make ends meet. High interest rates can send credit card balances out of control.

• High interest rates: Although legislation designed to protect consumers is now law, credit card companies are responding by increasing interest rates to replace revenue lost when certain practices and fee assessments were outlawed. The complicated methods credit card companies use to calculate interest can cause interest owed to increase rapidly.

Eliminating credit card debt saves money and improves your financial security; develop your own debt repayment plan or get help from credit counseling and debt consolidation programs. Although your credit rating can decrease during a debt management program, you can increase your savings and eventually rebuild your credit by making mortgage, vehicle, and student loan payments on time.

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