CARD Act Could Negatively Impact Creditworthy Consumer Credit Scores

Credit card holders have begun receiving notices about changes to their card agreements and some of the changes could lead to lower credit scores.

Some of the new practices creditors are employing are mandatory under the new Credit Card Accountability, Responsibility and Disclosure Act (CARD Act), which took effect last month. Many others, however, are creditors’ attempts to replace revenue-generating practices that were banned by the new law.

Dan North, chief economist for Euler Hermes expects most cardholders will ignore the mailed notices.

“The rule changes will go completely unnoticed by most card holders until it is too late… Until the change costs them,” he said.

For those cardholders who are paying attention, some may find that card membership is no longer free, fees may be charged for little or non-use of their credit card during a given period, dormant accounts will be closed, and that no-payment for several month offers are gone, among other things.

A proposed rule change by the Federal Reserve, scheduled to take effect in August if approved, would ban fees for inactivity and multiple penalty fees, and fees for declined transaction fees. But some of the changes creditors impose, including lower credit lines, may negatively impact consumer behavior as well as their credit scores.

Research by VantageScore Solutions LLC – a new generic credit scoring model used by lenders for consistent interpretation of consumer credit files across all three major credit reporting companies – shows the vast majority of consumers who experience a credit line decrease are not seeing their credit scores drop precipitously, said Sarah Davies, VantageScores senior vice president of analytics and product management.

“For example, consumers who carry a balance close to their credit limit have no room for a decrease, so there is no added impact to their credit score when a credit line is decreased,” Davies said. But she said cardholders with high credit limits and good payment records are more vulnerable.

“Consumers with high credit limits who pay off their credit card balances every month or those carrying a balance in the middle range of their credit limit may see a small drop in their scores,” Davies said.

Davies said the latter group’s credit score is more negatively affected by a lower credit line because for consumers with higher credit limits, the algorithm is more sensitive to changes. “Variables such as utilization have the room to play a greater role, although the drops we’re seeing in the score are very small on average,” she said.

But industry experts say how consumers respond to creditors’ new rules could have as much of an effect on their credit score as the changes creditors impose. For example, consumers who choose to close an account could be lowering their overall credit score if their overall outstanding debt hasn’t declined much, said Craig Watts, spokesman for FICO.

That’s because credit scores are comprised of four key factors:  payment history, outstanding debt, available credit and account tenure.

“When you close an account, it changes not just how many you have open, but the total amount of cash you have available,” Watts said.

Davies said closing an existing credit card account also can hurt a credit score because it erases the length of credit history, which is calculated as part of “Depth of Credit.”  “If a consumer must close an account, closing the oldest account is the least favorable option because the longer a line of credit is open, the more history a consumer has accumulated,” she said.

Lauren Bowne, staff attorney at Consumers Union, the non-profit publisher of Consumer Reports magazine, suggests making a few small purchases on cards held for emergencies to keep them active. But don’t forget to pay them off quickly and don’t do it if you might forget. ”Don’t do it if you’re missing a payment because you forgot to make a payment. Don’t get yourself confused,” she said.