So, lately I have been watching Suze Orman and liking it!  She has a lot to say about the economy (who doesn’t?) and is a spokesperson of confidence for the FDIC.

 

She speaks of how Wall Street is affecting Main Street and how the middle class is getting hurt and the lower class is getting creamed. I have heard her make interesting comments and give pretty solid advice.  I want to focus on one point that I hear her stress often. 

 

Suze Orman has pointed out something that has been going on for some time. Banks have been reducing and freezing credit limits on credit cards and that is hurting the American consumers’ credit. Banks are reviewing credit history and are deciding to reduce available limits before folks have an opportunity to increase the debt. This is smart in that it stops people from getting further in to debt, but as Suze points out it also increases the debt to available credit ratio.

 

Your debt to available credit ratio is the amount you have used v. the amount you can use with your credit card.  The more credit cards that you have tapped out over 50% (debt to available), to lower your score will be. This formula consists of 35% of your FICO score profile.   FYI: the computer looks at each credit card alone, it does not add them up and average them out.

 

Here is how it works.  Joe has a credit card with a $10,000 limit.  He has charges $4,500 on it and pays it off slowly.  Joe has a 45% debt to available credit ratio.  This is acceptable.  The bank reviews Joe’s payment history and overall debt load and decides to lower his high credit limit to $7000.  Automatically, Joe has increased his ratio to 64%.  Ouch, he is over. I guarantee you this will lower your score overnight. I have seen score go down 20 points by high credit.  Ok, so the bank wants you to cut back, but the ruin your FICO score in the same vein.

 

 

What can you do to avoid this?

 

·        Review your credit cards and calculate the credit used v. available

·        Make sure they are all under 50%

·        If a few are close transfer some of the balance to another card

·        Do not close out cards you do not use, because you might need to use them again

·        PAY YOUR BILLS ON TIME

 

Thanks, Suze!  I will be watching you (and adding my own two cents in…….)

 

 

Dale Siegel