Why Balance Chasing Can Hurt Your Credit Score

First, let me explain what “balance chasing” means. If you own a credit card and carry a balance, you may have recently received a letter in the mail from your creditor telling you they’ve lowered your balance. Maybe you originally had a $6,000 balance, they cut it down to $4,000 and you owe $3,900. This is balance chasing, and here is some advice on how to deal with it.

Balance chasing is when your creditor cuts your balance down to just above what you owe. They do it because they’re trying to reduce risk, but they also stand to make some money in over the limit fees and an increased interest rate if you in fact go over your new limit.

Balance chasing most often happens if you:

Make a large payment on your credit card – you’d think they’d like you to do this

Pay just the minimum on your credit card

Pay off your balance very slowly

Why Balance Chasing Hurts You

Balance chasing hurts you because it has a direct impact on your credit score, your FICO. Your score is comprised of a number of factors. One of the most important factors is your debt to credit ratio.

Your debt to credit ratio is the amount of debt you have compared to the amount of credit you have. If, for example, you have three credit cards with $1,000 of credit available to you on each and you don’t carry a balance, your debt to credit ratio is wonderful. If you owe $900 on each card then your debt to credit ratio is not good.

Normally, when you make a large payment on a credit card, your credit score goes up a bit. This is because you lessened your risk and improved your ratio.

However, when a creditor cuts your credit to just above what you owe, it now looks like you’ve maxed your card out and your debt to credit ratio is worsened. This in turn affects how other lenders see you. They may not be willing to give you credit or they may give you credit but at a much higher interest rate.

Preventing Your Creditors from Balance Chasing

There’s one sure-fire way to prevent creditors from doing this to you – pay off your balance and don’t carry a balance. Short of that, what else can you do?

Some experts recommend not making any large payments on your credit cards.

You can spread your payments out so you don’t show any abnormal activity and attract their attention.

Additionally, you can request credit limit increases on your other credit cards, thus altering your overall credit to debt ratio and improving your credit score.

Balance chasing is a direct result of the economy and a reaction, in part, to the Credit Card Accountability, Responsibility and Disclosure Act. Creditors are looking to survive and will continue to find new and unusual ways to get around the new laws in place. Pay close attention to your credit cards, pay off the balance as fast as humanly possible and learn to eliminate credit card debt from your life.