FICO credit score has flaws, congressman says

06.30.09
By Sarah Beldo

Over the past several months, many Americans have felt the negative impact of the credit crunch, even if they have a flawless borrowing history and also repay their credit card debt on time.

Research published by Credit.com in March revealed that 8 percent of consumers have had their credit limit cut, as banks cite a riskier lending environment.

And now Congressman Luis Gutierrez of Illinois is questioning whether these rate cuts could be unfairly punishing people by lowering their credit score, Bloomberg reports.

To determine a borrower's credit score, FICO considers a range of factors, including credit utilization. Some experts suggest consumers should not use more than 10 percent of their available credit at a given time, in order to keep the ratio low - which will benefit your credit score.

But what if a financial institution suddenly reduces the amount of credit you have access to? You could potentially end up exceeding that 10 percent recommendation - and your credit score could suffer in the process.

According to Bloomberg, Gutierrez is planning to call a meeting of the House Subcommittee on Financial Institution and Consumer Credit later this year to discuss credit scores.

"Reductions to a consumer's line of credit based upon the lending institutions' overall appetite for risk has little or no bearing on a consumer's own risk of default," he told the news provider.

The worry is that consumers who - through no fault of their own - have had their credit limits cut will find themselves paying higher interest rates on other types of loans.

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Banks have been cutting credit limits, which can affect a person's credit score