Balance Chasing

Balance chasing is the practice by some banks of reducing a customer’s available line of credit as they pay down their credit card balance.

Balance chasing means that instead of freeing up credit, the customer has less available credit due to the lower credit limit. A credit card issuer could engage in this practice to limit its risk by reducing the amount of a particular borrower’s available credit. Balance chasing may be more likely if the cardholder appears to be a high-risk borrower who makes late payments or defaults on other credit cards or loans. An unintended consequence of balance chasing is that even though debt repayment is responsible consumer behavior, it can make it difficult improve a credit score, such a FICO score.

FICO scores take into account five factors to determine credit worthiness: payment history; current indebtedness; types of credit used; length of credit history and new credit accounts. In general, payment history represents 35 percent of the score, accounts owed 30 percent, length of credit history 15 percent, new credit 10 percent and credit mix 10 percent. Payment history measures whether credit accounts are paid on time. Credit reports show payments for all lines of credit and indicate if payments are received 30, 60, 90, 120 or more days late. Paying on time generally will prevent balance chasing. Accounts owed in the FICO score refers to total amount owed. High debt does not necessarily mean a low credit score. FICO considers the ratio of money owed to the amount of credit available. So, the lower the percent of credit in use, the better it is for the score.

If a cardholder borrows the maximum on a $5,000 credit line, their credit used is 100 percent. If they pay down that balance to $4,000 and the credit line remains at $5,000, then credit used drops to 80 percent. But if the credit card issuer chases the balance and cuts the credit limit to $4,000 as soon as they pay, the credit used remains at 100 percent and their credit score will not improve. If a cardholder continues to make new purchases, they would need to be aware of the allowed limit. Balance chasing could result in an unexpected drop in the maximum allowed and cause subsequent purchases attempted with a card to be declined at point of sale. If the cardholder opted in to overlimit fees, new transactions could be approved but with fees charged for exceeding the credit limit.