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Changing standards can affect existing credit

November 6, 2008

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The election may be over, but having a new president won't put an end to the recessionary issues affecting this economy.

Just consider the recent Federal Reserve report that found lending is tight and is probably going to get tighter.

About 85 percent of domestic banks - up substantially from 60 percent in July - reported having tougher lending standards for large and middle-market business loans, according to the Federal Reserve's "Senior Loan Officer Opinion Survey on Bank Lending Practices." About 75 percent of banks had tightened their lending standards for small firms over the same period.

As for consumers, don't count on swiping those credit cards as much. Nearly 60 percent of banks responding to the Fed survey said they had strengthened standards for existing credit card customers. And about 60 percent of bank respondents reported cutbacks on credit card accounts granted to customers who did not meet their credit-scoring thresholds.

You would expect the banks to be cutting or lowering credit to nonprime borrowers or those at risk of not paying their bills, as 60 percent of institutions reported. But 20 percent of all domestic banks reported having reduced credit limits on existing credit card accounts to prime borrowers.

Half of domestic banks indicated that they had become either somewhat or much less willing over the past three months to make consumer installment loans, up from 35 percent in the July survey and the largest percentage in more than two decades.

About 95 percent of banks that had reduced limits cited "a less favorable or more uncertain economic outlook and reduced tolerance for risk as reasons for the action," the Fed said.

While the banks are reducing their risk, as a credit user you too should be proactive. The challenge is to manage what credit you have left.

The repercussions of a lower limit can trigger a reduction in your credit score. That's because if you continue charging and you aren't aware that your limit has dropped, you may max out your credit card or go over your credit limit. Those two incidents factor negatively on your credit score.

Here's what you need to do to make sure the tightening lending standards don't erode your good credit standing or further damage an already troubled credit history:

¢ Check the current credit limits on all your cards. By law, the companies can lower your limit. But they have to give you notice. The problem is that consumers often miss the notification.

¢ Once you've verified, check to see what your utilization rate is on each card and then on all the credit cards together.

The credit-scoring algorithm looks at the credit utilization rate for each active account and, separately, a person's credit usage for several accounts together. So let's say you have four active credit cards, each with a credit limit of $5,000. Three of the cards have zero balances. The fourth card has an outstanding balance of $4,000, which means you have an 80 percent credit utilization rate on that card. Being that close to maxing out on just this one card will hurt your credit score. You may also see your interest rate rise because you're closer to your limit.

However, your overall utilization for all four cards is just 20 percent, which is good.

¢ If you can't pay off the debt every month, at least pay it down. If you are using more than 30 percent of your available credit balance on any one card or on all of them together, you could see a significant drop in your credit score.

If your credit score drops, you may lose your status as a prime borrower. Your issuer may raise your interest rate. And you may not be able to find another card with a lower rate.

¢ To avoid missing any notification about your credit account, see if your issuer provides an e-mail or mobile notification of changes to your account or when you may be nearing your limit. This will allow you to keep track of your credit utilization and avoid having that embarrassing moment when your card is declined.

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