Reader Digest's ideas of using credit

In September 2005 issue, Reader's Digest suggested that we should not close credit accounts we no longer use.

"When lenders decide whether to extend credit, they look how much of your available credit you're already using - poetically called your utilisation ratio." It went on, "Let's say you have five credit cards, each with a $10,000 limit, and your total balance is $6,000. That gives you a utilisation ratio of 12% - not bad, in the eyes of lenders. But if you close four of your of those accounts, your ratio suddenly jumps to 60% - no good. 'You haven't borrowed an additional cent, but on paper it looks as if you're closer to being overextended,' says Craig Watts of Fair Isaac, the company that developed the credit rating system."

There are several issues here.

1. Technically, Reader's Digest is correct. By cutting down your credit cards and thus reducing your limit, your credit report will look worse. It is more difficult for you to get further credit.

2. The problem lies in the hidden messages. Just think,
a. Why do you need further personal credit, while you already have $50,000 credit card limit?
The article makes you accept this situation before putting forward their view. Unkwoningly we accept the situation that it is ok to have more personal credit lines.

b. $6,000 credit card balance, ouch! What on earth are you spending? The targeted readers of Reader's Digest is Asia middle class like you and me, thus, the example of $6,000 credit card balance is totally unacceptable as good financial practice.

You are either charging $6,000 for the month or having a $6,000 accumulated balance from previous months that you were unable to pay off. In either case, it is unacceptable.

The article basically makes you feel ok to have $6,000 credit card balance.

c. Under the credit rating system developed by Fair Isaac, a middle class with $6,000 credit card balance and $50,000 approved limit is more credit worthy than a middle class with $600 credit card balance who choose to have $2,000 credit card limit. This is the failure of its credit rating system, or the entire banking credit rating system. It is bizzare that we have to adjust for that.

d. Such credit rating system rates a person who don't require loan with lower credit worthiness than a person who needs loans and manages to get huge credit lines. It actually promotes a culture of borrowings.

I was very fond of Reader's Digest. It was many years ago when the world was still divided between West and East, democracy and communism, black and white, free world and iron curtain, good and evil, etc. Such black and white world ended in 1989.

Today, it allows advertorial like "Managing Your Money", that promotes financial products, openly giving so called "financial advices" in their advertisement.