Tapping into credit not an easy task

Can you still count on the credit you thought you had? It’s a fair question for everyone in this economy, including people who pride themselves on never missing a payment.

Since early this year, lenders have been cutting back on the credit lines they had previously approved for home-equity lines of credit and for credit cards. Here, several industry experts answer your questions about credit.

Q. Can I count on my home-equity line of credit being available when I need it?

A. Maybe. Banks were still reining in existing lines of credit last summer, according to a Federal Reserve Board survey released early this month. Between July and the end of September, about 20 percent of banks reduced credit limits for accounts held by borrowers who had prime credit ratings. About 60 percent shrank credit limits for their subprime customers. And that was before the worst of the financial crisis hit in October; the Fed won’t report those numbers until early next year. Your risk of a cutback is highest if home values are dropping sharply in your community.

Q. I pay my bills on time. Why did the bank lower the credit line available on my Visa, MasterCard and American Express?

A. That same Fed study showed that about 20 percent of banks lowered credit card limits on prime borrowers. About 60 percent lowered credit limits for their subprime customers. They blamed some of the cutbacks on borrowers’ deteriorating credit scores or on their history of missed payments. But some of it was simply a result of banks shying away from the risk of lending money all together.

Q. If the bank reduces the credit line available to me, will that damage my credit score?

A. It might, if you don’t also reduce your borrowing, said Tom Quinn, vice president of global scoring for Fair Isaac. That’s the firm that takes credit reports on file with major credit bureaus and applies its own secret recipe to cook up FICO scores that range between 500 and 850. The higher your score, the more credit and lower interest rates you can expect.

FICO likes to see people who are approved for lots of credit, but who keep their borrowing in check. Quinn said lenders’ cuts in credit lines seem to be modest, and will have only a modest effect on scores overall. “For certain individual consumers, that impact on scores can be greater,” he said.

If the bank shrinks your credit line, try to reduce your borrowing by a comparable amount or it may damage your scores and raise your borrowing costs.

Q. I’ve put my credit cards away in a drawer so I won’t be tempted to use them. Will that hurt my credit score?

A. Not unless you go on an extreme no-credit diet for the long term. “It might drop a little bit, but nothing to worry about,” Quinn said. Don’t close the accounts, though. Reducing the amount of credit available to you could damage your scores.

Q. When I buy something in a department store, they always offer me 10 percent off the purchase if I open a new credit card account. I want the savings. Should I do it?

A. No. Open a line of credit only when you really need it. Even then you’re better off taking out a Visa, MasterCard or American Express, which are not limited to purchases made from a single retailer. Remember, just one late fee on a store credit card could wipe out the 10 percent savings you got when you opened the account.

Q. Can I still get a mortgage?

A. Yes, if you can prove that you have income and cash for a down payment. Glenn Kelman, president of Redfin.com, an online real estate brokerage, said buyers have been able to get financing this year, mostly with FHA mortgages.

However, fewer borrowers will be eligible in 2009 for these low-down-payment loans insured by the Federal Housing Administration. This year, FHA eligibility was stretched to cover mortgage amounts as high as $729,750 in expensive housing markets. In January, that loan limit is set to shrink to $625,500.

Q. Will a job loss hurt my credit score?

A. Not by itself. Credit bureaus don’t have any way of knowing that you’ve lost your job. But your borrowing behavior may tip them off. They are watching for a sudden increase in your borrowing or a new habit of missing payments, either of which can signal that you’re jobless. Don’t be surprised if they react by lowering your credit lines and increasing the interest rate on your credit cards. The interest rate on a home-equity line of credit will adjust as market rates change, but not because of changes in your credit scores.

Q. If I lose my job, will they take away my home-equity line of credit?

A. Again, they won’t know unless your borrowing habits tell them. If your credit card borrowing shoots up, the bank may shrink your line of credit, assuming you haven’t already tapped the full amount available to you.

Q. How often should I use a credit card so it doesn’t become an inactive account?

A. Make a habit of using each card once every six months, and pay the bill before the grace period expires and you start to owe interest. That way you will continue to feed positive information about your responsible credit habits to the credit bureaus, which will help preserve your credit scores.

Q. How much equity do I need to qualify for a home-equity line of credit?

A. More than you used to. Joe Belew, president of the Arlington, Va.-based Consumer Bankers Association, said you should expect to qualify only if, when the home-equity line of credit is added to your first mortgage balance, the total hits no more than 80 to 85 percent of the home’s current value.