Bank failures have captured the headlines over the last few weeks. Silicon Valley Bank and Signature Bank along with a few others have been taken over the U.S. government. How does that impact you when you have an account with one of these failed banks. It can have a huge impact – almost always lower – on your lender’s FICO Scores.
There are three concerns from when a bank fails in how it can impact your credit scores. I will walk through them.
- Loans being transferred to High-Risk Lenders
- Credit Cards being Closed
- Credit Cards Lines being Reduced
Loans Being Transferred to High Risk Lenders
When banks go under, their personal, auto and other types of loans have value. They are usually sold off to other lenders. Most of the time, they are sold to other banks or depository institutions. Periodically, they are sold to higher risk lenders who are willing to pay a higher premium for those loans. However, for consumers, the damage to the FICO scores can be for up to ten years after the loans are paid off.
To the consumer, you have done nothing wrong. However, the damage is very extensive for years.
Credit Cards Being Closed
Fellow banks and other depository institutions are usually the first in line to purchase credit card accounts. They are not however so willing to keep those lines open all the time. Depending on the quality of credit cards issues by the failing bank, the new bank could simply close down the line of credit. How does that impact FICO Scores?
If someone has a credit card balance of $2,000 with a credit limit of $5,000, that person would have a utilization ratio of 40%, not ideal but not suffocating to the scores either. If the new bank drops that line of credit down to $0, now it appears the person is overdrawn by $2,000. That is not good. It will drop FICO Scores 40, 50 points and even more real quick.
You will also lose any depth to your credit history as a credit card is closed. Many credit cards have been opened for many years. If the new bank closes that credit card, you have lost that depth.
Credit Lines Being Reduced
In the previous example, if the new bank dropped the credit line down to $2,000 – which is a common occurrence – the utilization ratio goes from 40% up to 100%. That is not a good thing.
How to Protect Yourself?
It is always wise to have your credit cards with different lenders. In this case, if a lender has a problem, they do not totally tank your FICO Scores. You would have other credit card that could stem any real impact to your credit scores.It is always best when you first open any credit card. Spread them out with different lenders. Don't wait until there could be an issue. Better to do it now than wait to do it later when it is a bigger problem.