Despite Credit-Limit Reductions, FICO High Achievers Continue To Fare Well

A recent study conducted by FICO shows that credit-limit reductions are not hurting consumers with high credit scores. To manage risk, lenders have been reining in available credit, which isn't surprising. What is surprising, though, is that -- even though lenders have cut limits for those who are considered low risk -- scores have actually trended upward, according to FICO.

FICO's research, which looked at data from April 2008 to October 2008, focused exclusively on the impact that credit-limit reductions or account closures had on consumers with no "recent risk triggers" on their credit reports. A risk trigger was defined as a late payment, collection, or public record. While FICO confined its study to those three risk triggers, I was interested in some of the additional risk triggers that FICO said lenders look for. Indeed, FICO says that some risk factors that lenders look at include excessive cash advances, overdrawing checking accounts or bouncing checks, and unemployment benefits that consumers collect. Those factors suggest that lenders are going well beyond the credit report to assess risk. In other words, heads up.

Meanwhile, the study's findings also shed some light on why FICO recently decided that it would not tweak its scoring model to account for the number of credit-limit reductions that consumers have recently experienced (see story here). According to FICO, only 16% of the United States population experienced a reduction in total revolving credit from April 2008 to October 2008. Some five percent had a risk trigger; the remaining 11% did not. And remember: the no-risk-trigger group actually enjoyed a score increase during the study period.

Here are some of FICO's findings:

Lenders targeted higher scoring population — Our analysis of data from April 2008 and October 2008 shows that when lenders reduced the amount of credit available to people whose credit reports had no recent risk triggers, lenders were targeting borrowers with inactive or low-balance card accounts. On average, this population already tended to be very low-risk. Their median FICO score was 770, and their card accounts typically had: a very low balance, low credit-utilization ratio (see FICO's utilization primer here), very few if any missed payments, and a long credit history. As a result, small reductions in total revolving credit had minimal effect on their FICO scores.

For borrowers in the no-risk-triggers segment who received a reduction in total revolving credit, the median FICO score actually increased from 768 in April to 770 in October 2008. Contributing to this positive score change were lender updates to their credit reports which reflected good credit habits such as paying bills on time, paying down revolving debt, and taking on new credit sparingly.

The median FICO score for the national population did not change between April 2008 and October 2008. (Based on Equifax data alone, the national median FICO score remained 713.)

Credit utilization rate changed little — On average, lenders reduced the total revolving credit available to a borrower in this population (no risk triggers) by $2,200, a relatively small amount. That is approximately 5 percent of the average total revolving credit ($44,000) available to this population during the six-month period.

Let me point out one thing. That median Equifax FICO score of 713 is interesting. You'll recall that I recently interviewed Craig Watts, public relations director for FICO. I was told that the median score had fallen to about 720 -- down slightly from FICO's most recent figure of 723. "Though there has been a large focus on at-risk consumers since the onset of the recession, the majority of the people in the United States continue to pay bills as agreed. Consequently, when looking at [the] entire distribution, FICO scores are remaining relatively stable," FICO's Craig Watts told me at the time (story link here).

If Equifax's median FICO score was 713 in at the end of October, then what are the median FICO scores at Experian and TransUnion? Equifax's recent median score suggests that median scores at TransUnion and Experian must be significantly higher. Let's just say that I am scratching my head over this one. Scores could be higher at Experian and TransUnion, sure, but would they be high enough to bring the median FICO score for the general population -- using all three bureaus -- to 720? (If one of my readers has an explanation, feel free to offer it in the comments section. Thanks.)

You can view all of the findings of FICO's study here (link).