Smartmoney.com had another story about credit card issuers cancelling cards that were inactive or little used, regardless of the credit history. The card companies clothed their actions as a benefit to card holders, reducing the risk of id theft or credit fraud; the article’s author pointed out that it actually limited financial exposure of the issuer in hard times.
What struck me was the discussion of the effect of canceling cards in good standing on the card holder’s FICO score. Canceling an unused but available credit card increased the credit utilization percentage of the former card holder; they went from using, say, 20% of their available credit to using 75% of the available credit. Their FICO score drops significantly.
Which brings me to my real point: just how meaningful is the FICO score? Do you really think the card holder whose zero balance card is canceled unilaterally is really a poorer credit risk as a result? Really less likely to pay their bills? Really more likely to run amok, credit wise?
I think we have been sold a bill of goods on FICO scores. FICO has become important because FICO, and all the companies that subscribe to FICO, say it is. So I see bankruptcy prospects who are drowning in debt, but petrified that getting free from debt will harm their credit score. Arghhhh!
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