Are There Conflicts of Interest in the Credit Industry?

BY busadmin  January 28, 2009 at 10:48 AM EDT

Credit cards; Photo by Andres Rueda, via Flickr

Question/Comment: A business advice columnist in The Oregonian recently answered a question about canceling a credit card when the issuer changes the terms. One of her comments was that it always has a negative impact on one’s credit score to cancel a card.

My question: Is there the same kind of conflict of interest between the three agencies that rate consumer creditworthiness and credit card issuers that existed between credit rating agencies and issuers of asset-backed securities? If consumers can’t cancel a card with onerous terms without damaging their credit score, the consumer appears to be in a “no win” situation.

Paul Solman: I don’t know. I suppose the issuers and agencies COULD BE in cahoots. It seems almost everyone else is.

But I don’t believe the Oregonian’s premise that canceling a card necessarily hurts your score. The very little research I’ve done suggests that it CAN hurt, but for reasons like it could lower your overall credit limit, which high balances on the remaining cards might negatively affect.

For example: You have a $10,000 limit on each of two cards. You have, say, a balance of $4,000 on one and $1,000 on the other. You cancel the one with the lower balance because the rate shoots up but in the process, you go from using 25 percent of available credit — $5,000 out of $20,000 — which is considered modest, to 40 percent — $4,000 out of $10,000 – which is considered riskier.

There are other reasons a cancellation might hurt your score but you don’t need collusion to explain them.

Editor’s Note: For more on credit cards, check out Frontline’s program ‘The Secret History of the Credit Card.’