Credit Repair Blog

How the Banking Crisis Can Affect You (Even if You Have Good Credit Scores)

When we read about the disasters at Lehman Brothers, Bear Stearns, and others, it is sometimes hard to understand how those problems affect average Americans.  Sure, its pretty clear that people who have lots of money in the stock market are affected by the crisis.  And certainly, people who work at the big banks have some problems.

But what about the average American who doesn’t have stock in one of the troubled banks? 

Unfortunately, the banking problems on Wall Street affect us as well.  Here’s one way you may be affected.  Banks are tightening their control over credit card and mortgage defaults and delinquencies, and are taking proactive steps to avoid losses even before a customer is late.  In fact, banks are targeting credit card holders who have never missed a payment.

Some credit default models (mathematical predictions of what type of consumer is likely to default on an obligation) take card usage into account.  For example, if you have a perfect credit score, and have never been late on a payment, but are engaging in what the banks consider “risky” credit behavior (like taking out cash advances, making unusually large purchases, etc.), you may be tagged as a risk for default.  That is, you are tagged as having a potentially bad credit reputation.

If you are considered risky under these models, the bank may take steps to reduce their loss risk by reducing your credit limit or increasing the interest rate they charge you.  This year, some cardholders (who have never been late on a payment) have had their interest rate raised from around 9 percent to over 25 percent.

There’s not much you can do, other than to maintain a great credit score and keep great credit habits.  Also, make sure to start a savings fund so that you do not need to rely on cash advances for emergency purposes.

The Wall Street credit crisis, unfortunately, is going to affect all of us for a while.