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Falling Credit Limits Impact Consumers

Credit card issuers slashed credit for an estimated 24 million borrowers who paid their bills on time, and a third of those consumers saw some drop in their credit scores during a six-month period, a new study says.

The study, to be released Thursday by Fair Isaac - the creator of the widely used FICO credit score - shows that 8.5 million consumers' scores fell from the end of October 2008 through April 2009 after they had their available credit reduced by an average of $5,100. These consumers had no risk triggers such as a late payment. The typical score drop was "well under 20 points," according to Fair Isaac, with about 500,000 consumers experiencing drops of 40 or more points.

The data show that "the impact credit line decreases are having on credit scores is minimal," said Lisa Nelson, a vice president at Fair Isaac. "We believe they're continuing to target inactive and low-balance accounts."

The problem with this analysis, according to John Ulzheimer, president of consumer education for Credit.com, an information site, is that it "minimizes" the impact of lenders' actions on consumers. When lenders lower credit lines or close accounts, it could affect consumers' utilization ratio - which measures borrowers' debt to available credit - potentially lowering the score.

If a consumer has a credit score of 800, a drop of 20 points would still likely qualify the person for the best rate, experts say. But this same drop for consumers in lower score bands could have a significant impact on what interest rates they get, if they can even qualify for a loan.

"The fact that 8.5 million consumers have seen their scores reduced because of no fault of their own over the past six months is problematic," said Ulzheimer, "especially when you take into account that these people could have seen their limits reduced prior to the study and might see" limits cut further.

The effect of lenders' overall actions, he added, "is going to be much more than 20 points."

Richard Hunt, president of the Consumer Bankers Association, which represents retail banks, said banks are reacting partly to new credit card restrictions now starting to take effect.

"Their tolerance for risk has been reduced," Hunt said. "Banks want to lend money, but with tighter regulation forced by Congress, they are having to adjust."

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