Last week I got two letters – one from GE Bank (that provides credit services for Lord & Taylor) and one from Chase. Both were somewhat apologetic and notified me of the credit line cut. In fact, they cut it so much that the credit limit is barely above the balance on the card.
Now, I don’t claim to have a credit score of 900, but it was a decent enough score, especially for a current economy. With lines cut like these, my credit score will undoubtedly plunge – because the integral part of it is an available credit to total credit ratio. As you can see, with a simple move two credit providers have just destroyed about 75 to 100 points of my credit score.
What does it mean in a long run? Well, I expect some more credit cards to do the same (although I don’t have that many anyway). That should bring my credit score down even more. Inevitably, some of the credit lines will get so close to the balance that cards get accidentally overdrawn. That pushes the score even further down. In a two to three months I expect my credit score to nosedive by no less then 150 points, with even more diving in the following months. There’s almost nothing I can do to prevent that. Obviously, if I was capable of paying off all the balances – I would have done that a long time ago, but I would still need some credit for operations anyway.
So what these credit companies are looking at is in approximately 3 to 4 months driving my credit score down so much that I would stop caring about it. Then, an interesting thing happens – once you stop caring about your credit score, you realize that you can just stop paying credit cards, free up a lot of cash, stop answering calls from credit card companies for about half a year (imagine all the cash you can save by then), wait until your debt is sold to a collection agency, wait out a little longer and then make a deal on paying off just a fraction of the initial debt.
Once you’re done settling (even before you’ve paid off your balance) – your credit score will start to raise, in about a year you’re back to the previous numbers without the debt and with whole lot of cash. Credit company looses, you win.
Now tell me – what’s the rationale behind the initial action of the credit company to cut the credit line of an individual (or a business) that makes all the payments on time and always pays significantly more then a minimum payment? Does it all make sense? From my point of view – it doesn’t.
2 replies on “Credit Companies Want You To Fail!”
Credit companies do it to reduce liquidity constraints. They are potentially on the hook for everybody’s credit line, at least for a short while. Think cashflow instead of asset/liability.
Customers will respond because not everybody wants to destroy their credit for a few bucks.
you’re absolutely right about credit card companies being on the hook. The problem, the way I see it, is that “a few bucks” as you put it could be plenty of money for someone else. Think of it as of a bargain – if I were to offer you to sell your credit score(!) – how much would it worth to you? How much would it worth for someone who’s in the different situation than you – barely making it from check to check because of credit card burden? For those people (and I am not making a judgment here, just pure math, freeing up cash is much more important than the credit score which aren’t really putting their bread on their table, because cash does.