Balance chasing is a method employed by banks where they reduce a customer's available line of credit as they pay down their credit card balance. A seemingly unexpected move, it is used as a risk management tool by the banks. Essentially, the customer ends up with less accessible credit, despite paying down their debt – a scenario that can inadvertently surge credit utilization and negatively impact the customer's FICO score.
While being aware of balance chasing can help avoid undesirable effects such as declined purchases and potential fees, proactive measures like monitoring credit limits, keeping balances low, and carefully managing available credit can help mitigate its effects.
Balance chasing is typically associated with high-risk borrowers, identified as individuals prone to late payments or who are in default on other credit cards or loans. Even though repaying debt is generally considered responsible behavior, it can become challenging to improve a FICO score due to balance chasing.
To understand why this happens, one should familiarize themselves with the components of a FICO score. This credit score comprises five factors: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and the mix of credit (10%). Timely payments can help prevent balance chasing as payment history is a significant factor in FICO calculations.
For instance, if a cardholder maxes out a $5,000 credit line, their credit usage is 100%; if they pay down to $4,000 but the bank chases the balance and cuts the line to $4,000, the credit used still shows as 100%, leaving the credit score unchanged.
Balance chasing could inadvertently cause a customer's purchases to be declined if they aren't aware of their reduced credit limit. Overlimit fees could also be incurred if transactions are approved beyond this limit.
For card holders feeling constrained by balance chasing, they might consider balance transfer cards to avoid hefty fees, particularly if they are shopping for a new credit card.
Balance chasing is a practice that potentially affects credit scores negatively by limiting accessible credit as cardholders pay down balances. It's a key consideration for cardholders managing their credit limits and an essential component of financial planning.