Credit Score More Important than Ever Before

Lenders, particularly credit card issuers, are watching your credit scores more closely than ever.

In the 1950 film All About Eve, Margo Channing says, "Fasten your seat belts. It's going to be a bumpy ride." Channing's timeless line expresses perfectly what consumers can expect from their lenders in 2009.

The repercussions of subprime mortgage defaults have lenders scrambling to trim their risk exposure. As part of that effort, they're putting more emphasis on credit scores for new account applications and reviews on existing ones.  

The most commonly known credit score is the FICO, a number generated via algorithm from the data contained in your consumer credit report. The number quantifies how well you've managed your credit accounts in the past, and is presumed to be an indicator of how you'll manage additional accounts in the future. When you apply for credit, your lender reviews your FICO score to make an approval decision. After you've been approved for an account, your lender will continue to monitor your FICO, to ensure that your account terms remain appropriate, relative to the risk you present as a borrower.  

Indications are that credit issuers are tightening up their FICO score requirements and getting more diligent about monitoring credit scores going forward. Major credit card issuers have begun to reduce borrower credit limits and even cancel credit accounts based, in part, on FICO score changes.

Scores of scores

Credit card issuers may have also increased their use of internal credit score metrics, which offer more specific insights into your risk profile and charging habits. A card issuer, for example, might review your account data, inclusive of where you shop and how you make payments, to score you on:

• how likely you are to respond to direct mail offers

• how much profit you generate for the card issuer

• how likely you are to declare bankruptcy

• how likely you are to default on your card

Lenders use the results of this scoring process to make a variety of decisions about your account, including:

• whether your credit limit should be changed

• whether you should be sent balance transfer offers or blank checks

• whether your account should be canceled

• how long a collections officer should wait to call you after you miss a payment

Borrower beware

Because each lender has its own custom credit score procedures, it's tough to predict how, or if, the added scrutiny will affect you. Your lender may change your terms based on how much money you spend at Wal-Mart, or because you work in the real estate industry-or because you shop at Wal-Mart and you work in the real estate industry. You simply have no idea.

Not knowing what lies ahead pretty much ensures that your credit future won't go as expected. To protect yourself, make a plan to minimize your dependence on any one account, and keep your credit history clean.