Why Monitoring Your Credit Score Is More Important Than Ever During The Credit Crisis

Posted by Erik on October 2nd, 2008

As if life weren't hard enough already during this economic downturn, another side effect of the credit crunch is that your credit score could go down even without any negative information being added to your credit report! That's right, even if you're able to continue to pay all your bills on time, and pay off all your credit card balances in full, your credit score may still go down.

Here's why: a key component of your credit score is the percentage of your available credit that you are using. With lenders, such as credit card companies, becoming more strict in their lending standards, many of them are already lowering credit limits for huge numbers of their customers. Their rationale is that even though nothing has changed with the customer's credit profile, the bad economy makes the customer a worse credit risk than they were in a good economy.

Okay, fair enough, but now someone that had $25,000 in available credit might only have $15,000. And that person might have used on average $7,500 of credit each month. Even though that person isn't doing anything differently, they just went from using 30% of their credit to 50%. That's a big difference that will likely lower their credit score significantly!

Worse yet, since lending standards are now more strict, qualifying for the same loan today vs. a year ago requires a higher credit score. But yours will probably be lowered without even doing anything. Of course, your credit score may go down even further if you're unable to pay some of your bills on time.

If this all sounds pretty bad, well, it is. But there are some things you can do about it. First, check your mail. By law credit card issuers must notify you of a change to your credit limit.

Second, monitor your credit score. The best way to do this is to sign up for a credit report and score monitoring service. You can read our comparison of credit monitoring services to find the best one for you. Our top pick is Identity Guard, which gives you reports and scores from all three credit bureaus every quarter, monitors any changes to your credit report at the three bureaus daily, and gives you an amazing array of identity theft protection and internet security features. If you think you might be making a big purchase requiring a loan in the near future, you might opt for CreditCheck Total, which gives you unlimited access to all three credit reports and scores, which means you can check your updated credit score every day if you want. All our top recommendations offer free trials so there is no commitment and you can get your credit scores for free.

Third, if you know that you currently have a good credit score, apply for a new credit card. While the limit may not be as high as you would have qualified for a few months ago, whatever credit you do get can help replace the lowered limits on your existing cards. This is an even better idea if you are carrying a balance on your credit card, as you can take advantage of low or 0 introductory balance transfer rates. Read our comparison of the best balance transfer cards to find the best one for you or if you don't want to transfer a balance, check out our Editor's Choice of the best credit cards in different categories. Of course, if you're credit isn't good, don't apply for a credit card you think you might be declined for because applying for new credit can lower your score slightly.

We hope you find this information helpful. Check back often or consider subscribing to our RSS feed or email list as we will continue to provide tips to help consumers get through these tough economic times.