What should I do about my credit score, if anything?

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I was asked this question via a friend on Facebook:

I had a 785 mid score, with 3 open trade lines (all at less than 30%) until the bank dropped my credit limit to the exact dollar amount of my balances. Now I'm down in the 714 range. I'm now considered a low-mid risk…hmmmmmmmmmpppphhhh! Only way out I can see is paying off Visa.

On the flip side, I don't need my credit score now…don't need a mortgage re-fi, and already have all the insurance I need.

It's pretty stinky when banks reduce your total available credit because the side effect is, your credit is dinged.  What the bank has effectively done is make it appear as though you're a credit user who has maxxed out their credit cards to their limit!  I'd probably contact the bank manager to express you disappointment (to put it mildly) and to see if they will correct this and to learn why they did this.

Credit scoring modules reward borrowers who use 30% or less of their available credit line.  Borrowers who use less 50% or less of their available credit also receive favorable scores.   Borrowers are also being whammo'd by banks when they reduce their home equity lines of credit (HELOCs) if it increases their loan to value over 50%.

If this person was interested in improving their credit score, their goal could be to work on getting each credit card paid down to 50% of the new credit line limit.  I would start with the smallest debt first as the credit scoring system doesn't distinguish between a $5,000 credit card limit or $500 credit card limit.  If this borrower has a $500 limit and they pay it down to $250, it should have the same impact as paying the $5,000 down to $2,500.  Once one card is paid down to 50% of the new limit, continue to make minimum monthly payments and move on to the next lowest credit line limit and repeat until all of your credit cards are under 50% of the available credit line.  The next level of improvement would be to pay your credit cards down to 30% of your credit line limit; so if your lowest credit card line is $500 and you've been maintaining a $250 balance, the next target would be 30% of the credit line or $150 (500 x 30%).

I do not recommend paying off credit cards completely and closing if they're older as the credit scoring modules love established credit with a good history.  You can use your cards to fill your gas tank or buy groceries and paying it off monthly.

Of course, if you don't really care what your credit score is currently because you're not planning on making purchases that will require your credit score, you don't have to do anything.  However, I think it's best to try to have a credit score of 740 or higher as so many things in our lives are priced based on our credit scores. 

Related posts you might find interesting:

New Credit Card Regulations and Games Creditors Play

Overdraft Protection and Your Credit Score

The Fed is Getting Tougher on Credit Card Companies

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