Definition: Balance Chasing
Balance chasing is a practice credit card companies are using to reduce their risk, find out what it is and what you can do about it.
Balance chasing is when the credit card company cuts your credit limit to just above your balance. If you owe them $500, they cut your credit limit to $550 (or something close). This appears to happen most frequently after you make a large payment to reduce your balance.
Why does this matter? It will hurt your credit score because it'll look like you're maxing out your cards, even though you just did a responsible thing - paying down your balances. Technically, your credit utilization, one of the big factors in your FICO credit score, will go up because the percentage of credit you're using will increase as your limit decreases.
What can you do to prevent this?
There is only one way to ensure that balance chasing doesn't hurt you. Carry no balances. Even if a creditor reduces your limit, it won't hurt your utilization ratio.
Just another reason why you shouldn't carry a balance on credit cards.
Chasing The Balance — What It Is And Why It Sucks [CreditMattersBlog.com]
Jim writes about personal finance at Bargaineering.com.
(Photo: armydre2008)
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Comments:
Question: Does having a decent sum of money in the bank HELP your credit score? You know, being able to put your hands on, say, ten grand if you had to?
Received a letter this week from AT&T credit card I've had for years. I use it for travel and pay the balance when I get home. They want me to use the card within the next month or they will cancel it. I'm not playing that game... they can take their card and cram it.
Damn my responsibility. Damn NY. Damn the world.
Another revenue-enhancing wrinkle to this is, shorn of your credit balance cushion, you're much more likely to go over limit, then luxuriate in a cascade of fees, putting some card owners in a financial bind.
I had BoA pull a fast one on me a month or so ago...I had a credit card for 'emergencies only' that had a $12500 limit on it. I had used it a few months earlier for a plumber with no issues. On a road trip, I had to make an unexpected stop and the card was declined. I called BoA and they said they wanted me to verify I was holding the card. Fair enough. What they didn't tell me was they cut the credit limit to a measly $1250. I found this out when I got home and set up a payment. I'm glad I didn't have car trouble!
For the record, the card was immediately cut up. Screw you, BoA.
@johnarlington: If you are just going to let them close it, you might want to beat them to the punch and close it yourself. You'll get the "closed at customer request" note instead of the "closed by creditor" note.
@HurtsSoGood:
It does help you when you apply for a home loan though, which is when you would need the help the most.
@Chris Holland:
HSBC did the same thing to me.. from a $10k limit to $300 in one month. Had been a customer for 10 years, had carried a balance in the past, but not for a couple years. No negatives, nothing. I canceled as well telling them I had no use for a card with a $300 limit.
Credit card companies are trying to lower their risk level. We have a terrible credit card debt fever in this country that needs to be eliminated.
Boa is nothing but a money machine. They change the rules daily, literally I have a pile of "changes to your credit card agreement" on a card I have only had since the beginning of the year.
My favorite was when they took my 15k limit card and "upgraded" me to the Signature Card which has "no limit"
It is unfavorable on my credit report to have a card with no high limit. Boa doesn't care about the consumers credit though.
"Living debt free"
FICO does not punish you for living debt free! If bothers me when people post things like this.
Get a Credit Card and pay in full each month, FICO does not punish you for this!
__________
"Closing accounts you no longer use"
You have less availible credit, if you paid in full each month on every card, this would not matter.
__________
"Paying down or eliminating your debt"
This increases your score, as you will have lower utilization.
Citibank just did this recently to me. My limit was $6500 and I was carrying $1800. They chased the balance to $2000. At the same time they sent me a letter saying they'd "give" me bonus money to pay down my balance.
They'll pitch in 20% of what I pay over the minimum due for the next 4 statements, and they'll "pay" up to $400.
That sounds great, right? The catch is that they'll FURTHER reduce my available credit by the amount over the minimum due I pay (and the amount they pitch in).
I'll end up with a card with less than a $400 credit limit if I go for it, but I think I might just because it'll wipe out their profit from doing business with me.
Plus, I hate Citi now and would rather not do business with them.
The credit card companies seem to be happy with customers canceling cards when credit limits are dropped. Their actions are following the herd mentality of "all credit is bad, no matter how good it is." Banks started securitizing credit card debt years before mortgage bankers got into the game, and now they need to reduce their risk exposures.
In the long term, this will hurt them... when the economy recovers and consumer spending (which is about 2/3 of the economy) picks up again, they will miss out on the merchant fees and interest for all those folks that they cut off.
So once again, short term wins out over long term. You'd think they'd learn their lessons, but they don't.
So here is how you'll know that the economy has turned back around: when those credit card companies start flooding your mailbox with credit line increases and "please come back to us" credit card applications.
No, bank account balances and income are not a factor. If somebody has no CC debt and $10k in the bank, why should their score be higher than somebody with 0 CC debt and $500 in the bank?
Please learn what's in a FICO score before posting a comment that is not even close to being correct.
Read whats on that page and you will learn a great deal.
@wcnghj:
I completely agree.
You are not punished for living debt free. If you pay off your balance each much, you should have good credit.
@wcnghj: Fair Issac does punish you for not carrying debt. Your solution that everyone should own and use a credit card is a lousy solution. So Fair Issac has set their system so one MUST use a credit card in order to have a decent credit score? Sounds like a scam.
We went for a long stretch with no loans and no ongoing debts. Our credit scores tanked, worse than at any point when we owed money. Why? we had no loans, no credit cards and only had basic living expenses. Those basic living expenses don't show up on credit scores so our scores plummeted. Living within your means trashes your credit score. That is totally wrong.
The government needs to stop letting one private company totally own everyone's financial lives in total secrecy.
@wcnghj: That's what I was going to say. Buy a pack of gum. Card stays active, they gained nothing out of treating you like crap.
@bohemian:
credit scores are one thing - a measure of how good you have been of dealing with credit in the past. If you've never HAD credit, there aren't any data points for them to look at.
It's not a "scam", and I don't see what the big deal about using a credit card for stuff you are going to buy anyway and paying it off each month is - hell, use a rewards card and the bank pays you.
It's not a perfect system, but it's not completely unreasonable that a creditor would want you to demonstrate a history of responsible credit use before loaning you a bunch of money at a low rate.
@madanthony: You know I've just spent the last year with no credit card, ie living within my means and its really not that difficult.
@bohemian:
*Sigh*
If you have no open credit accounts, how are they supposed to access your risk? Guess what? They don't. If you have no open credit accounts, or account opened less than 6 months, you don't have a FICO score.
Open a credit card and pay in full, 6 months from now you will have a credit score. If you have no credit, how is one supposed to assess how responsible you will be with it?
Lastly, if you have excessive revolving(credit card) debt, FICO will punish you.
If you have no debt but open accounts, FICO will love you
Banks are being told to cut their risks as well as increase their lending.
My available credit is being increased and there is about zippo chance of me using the current levels of credit much less the increased levels of credit.
YOUR available credit is being decreased and you might need the available credit.
Anybody see a problem here?
Yet the banks are doing exactly what they are being told to do. Increase their lending and decreasing their risks. What a farking Catch-22.
@wcnghj: Why would you want to do business with someone that does not value you as a customer? I say cram it, use another card, or don't use one at all.
@bohemian: Yes, your credit score SHOULD tank if you don't take on credit. It's an assessment of one's ability to manage lines of credit. If you don't have any, then what logic makes you think that that you're not a credit risk in the eyes of lenders? It's not a scam, it's common sense.
By the same logic, the NBA should immediately draft me because I say that I'm an amazing basketball player. Never mind the fact that I've never played and that there are no statistics to back up my claim...
I just cancelled my Chevron card last night because they cut the limit to $100. I spend more than that on gas in a month! I guess when I went over that $100, they would be then charging me an over the limit fee. I called and cancelled. I'm happy to buy gas from another company in the future. Screw Chevron.
@LogicalOne: I have never cared about my credit, just pay my bills on time and don't carry any balances EVER on a credit card.
Last time I checked, my score is around 850.
Another reason to not have credit cards at all. After being screwed in one way or another by the bank of every card I had, I eventually decided that playing that game was not something I wanted to be doing. So I cut the tether.
Carrying no balance on a card can also be a negative mark. Having too many open lines of credit isn't a good thing. Iirc carrying a 30% balance looks best
@Troy Hardin: As long as you use it(aka make a payment or purchase on a credit card) they will update it with the Credit Bearaus and it will show recent activity.
Having too much credit available does not effect your FICO score negatively.
There are people on creditboards with 1million+ in Availible Credit and scores in the 800's.
humphrmi
In the long term, this will hurt them... when the economy recovers and consumer spending (which is about 2/3 of the economy) picks up again, they will miss out on the merchant fees and interest for all those folks that they cut off.
******************
I doubt it. People seem to have short memories, know that they are in part to blame for this mess, and love having credit cards.
@bohemian: Amen! I'm trying to buy a house right now, but my credit score is in the toilet because I don't use credit! So now I'm using and paying to try and get my score to come up so that I can qualify for an FHA loan. Yes, not using credit has actually made my score so low that I can't even qualify for that.
@wcnghj: I call BS on that my friend. I'm in that situation right now and they do not love me one bit.
Those accounts need to be at least one year old to help your score.
@supercereal: Good point & nice analogy.
However, why can't FICO take into account more aspects of your financial responsibility? It's not credit per se, but things like paying rent and paying monthly bills (cellphone, etc) under a long-term contract generally don't count in your credit score - and I think they reflect a lot about what kind of a risk you are. They need more realistic data.
@foodporncess: You don't understand. After atleast one account has been open 6 months you will have a score. If you pay in full each month before the Credit Card Companies report to the Credit Reporting Agencies, your utilization will be 0. FICO loves low debt and low util.
If you have no credit, how can they rate your responsibility with it?
@oneandone: Technically, if a cellphone company wanted to report on your credit reports, it would count in your FICO score.
@wcnghj: Because a credit score is a snapshot at how reliable you are in making a payment. No, money in the bank doesn't mean you'll pay your bills (I've seen people with fat cash in the bank and horrible credit). But it is a good indicator that you WILL pay your bills.
Too much credit? Yes it is a bad thing. The whole BS about available credit being used unwisely. Actually not BS, but in some instances it is.
BUT credit issuers look at your history with the issuer as well as your credit score. I have been with my banking institutions for longer than most Consumerist readers have been breathing air. I have an account which has been open for 35 years. Think by now the issuer has figured out my buying patterns and long term potential for default? Hells Bells the issuer can most likely tell you when/where/how much my next charge is most likely to be.
So when my credit lines are increased, what exactly is the issuer trying to achieve? Hope that I suddenly have the urge to remodel my entire house, add an inground pool and tennis court, spring for a new car or three as well as place the paid-in-full deposit on the around the world cruise for the extended family all in the same month and will use their card?
Yo, they know me. They KNOW none of that is about to happen, and if by some miracle it did happen, it ain't about to happen in the same billing cycle.
SO what is going on with banks and CC companies? Some idiot US Government agency has told them to lighten up on the credit rules and lend some $ at the same time another idiot US Government agency is telling the bank/CC company to tighten up on their credit risks.
Classic Catch-22
And I, and people like me, solve both problems. Increase my credit limit (impresses one idiot) knowing I will not use the increased limit, while the bank squeezes down the credit offerings to potentially less predictable customers which makes the other idiot happy.
@oneandone: Oh I absolutely believe that the FICO system is flawed. For such an important score to take so little into consideration seems off to me. You're definitely right that normal bill payments, not on credit, should play a big role in determining your overall fiscal responsibility. Some of the logistics seem tough, though -- I'm not sure I would trust some of my old incompetent landlords with access to my credit...
Just one more way the Fair Isaac Corporation punishes people for doing the right thing:
- Paying down or eliminating your debt
- Closing accounts you no longer use
- Living debt-free
Why does one number generated by one company have so much control over our lives?