She paid off her plastic, but now her credit score is headed south

By | November 16th, 2016

Sharon Lewis doesn’t think of herself as a deadbeat. She makes responsible financial decisions, which includes paying her credit card bill on time every month.

Target, on the other hand, apparently does think of her as a deadbeat. It recently rewarded her responsibility by slashing her credit limit.

“People who do business with Target and have a credit account with them should be made aware of this practice,” she says.

Target offers a line of credit and debit cards that are pretty standard. When you use one of the cards for select merchandise, you get 5 percent off your purchase. You can read more than you ever want to know about the card on its site, including its policies, which don’t look all that out of the ordinary.

Wait. I take that back. Actually, the kicker is the rates and fees: a 23.15 percent annual interest rate and late payment fees of up to $37.

And that’s how Target makes money. It can offer a 5 percent discount (or in the case of loyalty program affinity cards, lots of “free” miles) because it’s going to make even more money on late fees and interest.

And when it doesn’t? Then you’re a deadbeat. Credit card companies consider you a deadbeat when you pay off your balance in full and on time each month, avoiding interest and late fees — and depriving them of all that revenue.

And that’s exactly what Lewis is — a deadbeat.

“I’m not one for using credit cards if I don’t have to, to keep my debt as low as possible,” she explains. “I have not used the card this year. I paid off the balance on time, in full, never late on a payment.”

Related story:   Is my cruise refund really sunk?

She says in retaliation, Target cut her credit limit from $2,000 to $200. That’s right, they knocked a zero off it.

“Because of this, I learned today that my credit rating was reduced by almost 20 points,” she says. “I am outraged.”

Target denies it cut her credit because she paid on time.
“We reduce credit limits on our cards if they have not been used for an extended period of time,” Target spokeswoman Molly Snyder told me. “This guest reported that this was her situation. We do not reduce credit limits because a guest pays promptly or pays their full balance.”

According to the folks who create those credit reports, reducing your credit limit may lower your score. It may also raise your score. Who knows? Credit scores rise and fall for a multitude of reasons, so for all we know, the reduction of her credit limit might have had nothing to do with Target taking a shot at her credit limit.

This I do know: Credit cards kinda suck. They punish responsible behavior and reward reckless spending. There has to be a better way to pay than this.

Lewis knows there’s not much she can do. “I want consumers to be made aware of this practice by Target,” she says.

Consider it done.

Do credit cards suck?

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  • LDVinVA

    Did she contact Target and ask them to, at least, restore her credit limit? As to being considered a deadbeat if you pay your accounts monthly, that is what we do and our FICO scores are north of 800.

  • BubbaJoe123

    If you’re not using a card, card companies will often cut the credit available, since there’s a cost to keeping a large line open, and if it’s not generating any use, there’s little point.

    Also, companies will cut lines when they think there’s a risk to your credit score.

    I’d be REALLY surprised if having someone’s available credit drop by $1800 would have a really significant impact on their credit score, unless they had very little available credit overall.

    Credit cards can be a blessing or a curse – if you pay your bill on time every month, they’re great (5% off in this case). If you don’t, they can be terrible.

  • Jeff W.

    Your ire should not be directed at Target. It is their bullseye on the card, but the card is issued by TD Bank. They are the ones controlling the credit limits and the rules. As for the deadbeat label, while that is somewhat hyperbole, that is really also controlled by the banks and the big three credit bureaus.

    Unless someone is establishing a new credit history, a reduction of ones credit limit on a Target credit card should not really impact your score. But you are also correct, that there could be other factors in play. Yes, you could have paid off your balance every month, but other bills may have influenced the reduction. Plus, if you haven’t used the card in a year, they may also be reducing limit because of that. Too many variables.

  • Bill

    So was mine until I paid off my mortgage … dropped my credit score by 20 points because I have no installment debt (and also no revolving debt).

  • Charles Owen

    That “people who pay off their balances are deadbeats” thing has been floating around for a long time, but is really complete and total nonsense. Credit card companies love customers who pay off their balances every month. Maybe not as much as those who pay interest, but they certainly do not want to lose you. Every transaction involves a transaction fee of usually 2-3%. Since there are about $3 trillion in transactions in the US alone per year, that’s a lot of money. American Express, which charges a higher transaction fee, BTW, earned about $7.5B from interest in 2016 and $19.3B from merchant fees. If you think you’re sticking it to the credit card companies by paying your balance, well, not really. They are making money on you just fine and are quite happy to have you as a customer. That’s the reason they can easily afford all of these cash back and miles programs.

  • deemery

    Credit Rating companies also suck, in large part because their procedures are so opaque.

  • BubbaJoe123

    Their procedures are quite transparent, to their customers. So long as their scores correlate well with default rates, they’re doing their jobs.

  • redragtopstl

    Obviously, “deadbeat” means different things in different situations.

    Hubby was a credit & collections manager in various industries for 40+ years before retiring. To him, “deadbeat” is someone who does not pay what s/he owes for goods/services purchased on credit. And to our VISA, MasterCard, AmEx and Discover Card issuers, we must be mega-deadbeats, because we’ve ALWAYS paid them off every month without fail. Not to mention, nearly every car we’ve ever bought has been paid for in cash, and our last two residences have long since been paid off.

    If that’s the definition of a “deadbeat,” I’ll wear that label with pride!

  • BubbaJoe123

    That’s why I said “tongue-in-cheek.”

  • Michael__K

    The 2-3% transaction fee is a money loser when the card terms promise 5% back.

    So in this case, it’s not surprising if the credit card company hates the customers who pay off their balances every month and who seldom use the card at other merchants.

  • greg watson

    Credit Cards do not suck, & I am somewhat surprised that the question was even asked. I have paid off my card every month for the last 35 years (from about 4 different banks, over time) & have never had a problem. I usually lower my limit to $3000,
    myself.

  • Patrica

    Such a tough thing for me to answer. To me, the abuse of credit cards by people is what sucks. Buying on impulse, buying and having huge interest payments, not paying your card monthly, declaring bankruptcy and having it “gone”, that’s what sucks. I like my few cards. I like being able to use them in other countries. Imagine my surprise in Germany when I found that CASH was the acceptable way to pay for food, car rental, bus rides, etc. Don’t know if that’s changed, but it was so neat…If you wanted a set of cupboards for your apartment, you went with the cash to buy it.

  • mbods2002

    Credit scores are a game to be played. SO happy we can finally get our scores for free, anytime we want. I had a large bill to pay and was offered a card with zero interest for 15 months. Getting this other card raised my credit score quite a bit. It made my ratio of borrowing so much better. I should have the card without interest paid off in 12 months, they won’t like that. I’ll keep it and regularly charge something on it, wait for bill, then pay it off. That practice SHOULD keep my score high, unless they decide to drop me. If I close it out or get dropped, it will drop my score (that ratio thing). I can get another one that will raise it again, but not as much as it was. These things take time. Have to be careful there too as your score will lower (but not drastically) every time you have a “new” account. The one card I WILL keep is like 10 years old. I need that one to help the average of any new ones I get. SO crazy.

  • deemery

    “effective’ is not the same as ‘transparent’. I doubt a mortgage company, for example, has a clue how scores are actually calculated.

    And have you seen any data on just how well credit scores correlate to default rates? If the 3 agencies each have their own proprietary algorithm (which I think is the case), then there should be some variation in the correlation.

  • Charles Owen

    I know of no card that offers 5% back all of the time. Usually they have some categories and even then the total cash back is limited. These are loss-leader categories that get you to use the card more often. Even the 2% back cards are making a lot on the margin. I assure you, credit card customers do not hate customers who pay off their balances every month. Seldom using a card is something I’m sure they are not fond of, but look at any bank annual report and see how much they crow about interchange fees and card processing revenue. They are making a ton of money off pretty much everyone that holds their cards. They do not consider the 54% of Americans who pay their balance every month to be deadbeats.

  • Michael__K

    If the card offers 5% back at Target and the customer is using the card only (or predominantly) at Target, then how is the credit card company making money and why wouldn’t they have every motive to hate the customer who is paying that Target balance in full every month?

  • MarkKelling

    I pay off all of my credit card balances every month and have for at least the last 30 years. I have never had my credit limit reduced by any of them, including Target. In fact, Target just increased my credit limit by $2,500 to “help me get all those things I need for the holidays!” This on a card I use sparingly for maybe $100 in purchases every 3 months or so and only at Target.

    There must have been some other reason for what happened to the OP. Maybe there is some other negative entry on her credit report at one of the big 3 reporting agencies (possibly on a report not seen by the OP) that triggered the action by Target if she does indeed pay off everything on time.

    And no, credit cards do not suck. Most of us would find life difficult to impossible without a credit card. Most credit cards have fair terms. But like any other financial instrument, you have to know how to use it.

  • Rebecca

    I have a Target card, but I declined the credit option and just had it linked to my checking account. You pay with the card at the register, get 5% off, and it’s deducted right from your checking account via ACH. Since I very rarely use a credit card, I signed up for this. We only have 2 cards, one for business expenses since my husband gets reimbursed and one for everything else. I just don’t want to deal with paying random store cards each month, so I don’t have them. The nominal amount you get as a discount isn’t worth the hassle to me. The only reason I got the Target card is because I actually shop there relatively often, and the 5% does add up; there’s a 99% chance I’d pay with my debit card anyways. But I wouldn’t bother if they only offered a credit card.

  • Charles Owen

    I love credit cards. We pay our balance every month, like most people (53%). Since we use cards for pretty much everything we can, everything goes into the budget and is easy to track. I know how much I spent on groceries, on eating out, and lots of other categories. I can tell if our grocery budget is growing of we are using more gas. I can predict expenses and savings several months in advance with fairly high accuracy. Yes, you can do all of that with cash and careful entering of receipts, but who does that? Between Mint.com and a spreadsheet, credit cards make it easy to tell exactly where my money goes. I can’t say that about cash we spend. It pretty much goes and you never seem to know where it went. Oh, and we average about $35 a month in free income from rewards programs.

  • MarkKelling

    I am the exact opposite when it comes to paying for things. I always use a credit card. I refuse to use Debit except to get cash out of my own Bank’s ATMs. Debit cards are the worst thing ever invented because they expose your bank account to easy fraud. And, regardless of the promises your bank makes, it takes days to get your money back if you do experience fraud. I would rather the credit card company be out money because my card number was stolen than sit there with an empty bank account. Also, I spend on my credit cards like I would with a debit card — never charge anything I can’t pay off when the bill arrives.

  • MarkKelling

    The 5% is an instant discount off the total of your bill at Target if you pay with a Target card. It is not cash back. It is not paid out by TD Bank (the card issuer).

    TD Bank does get the normal interchange fee so they make something when you use your card even at Target (the actual MasterCard credit card that is, not sure how the Target store only card that debits your checking account fits in). As long as your account is not costing them anything through disputes or other out of the ordinary activity, there should be no reason to prevent you from keeping and using the card.

  • Rebecca

    I understand why you would do it this way. We have more than 1 checking account, so the card I use is for cash flow. I racked up a lot of debt in college and it took quite a while to pay back. So I have credit card aversion!

  • MarkKelling

    Germany (and Europe in general) still like cash. Old habits die hard. But in recent years more and more people are using credit cards for even the smallest purchases.

  • Charles Owen

    1. The credit card company is being paid by Target. Three huge income sources for Chase are United Airlines, Southwest, and Amazon. Do you think a company will call it a Target Card instead of their own brand for free? They are paid by the companies to put those names on the cards. The deals do vary. Amex actually pays Delta a huge amount of money, but that is because there are larger fees on their cards and the Amex interchange fee is much higher. Either way, everyone involved is making a lot of money.

    2. Companies are willing to pay money to a company for the advertising on the card and extra on transactions because they know you are more likely to buy from them when you have their card. They are subsidizing the card company because it drives business to them. The same applies for the Amazon card, which we have. Note that those great rewards apply only to the company, not general businesses. It works both ways, though. The deal with Delta is due to the fact Delta drives the business to American Express (like 20% or so).

    I thought Target is a bit different since I thought it didn’t do cash back, but instead was effectively a 5% discount for using the card? Correct me if I’m wrong; I don’t have the Target card. You’d be surprised how many companies would be perfectly happy to give you a 5% recurring discount if they can have you as a regular customer.

  • Michael__K

    Well, some party is absorbing the 5%. Assuming you are correct that party is Target. And Target in turn would have some influence on the actions of the issuer (TD Bank).

    Of course Target may have other ways of justifying the 5%, for example as a marketing tool. And they may have algorithms to estimate which customers are being profitably marketed to and which customers aren’t.

  • Michael__K

    Sure, I don’t disagree with any of that; see my reply to @Mark Kelling.

    Someone (Target apparently) is taking a 5% hit and expects to make up for it in sales volume. But they may have reason to believe that they aren’t coming out ahead with certain sets of customers.

  • Kristiana Lee

    My brother and I used to run a small business and I can tell you that we were the party absorbing that cash back.

  • Jason Hanna

    Remember that most places that give you a free score give you VantageScore, not an actual FICO score.. But, yeah.. I agree with you.. While the VantageScore isn’t really used by anyone, it gives you a ballpark figure of what your credit score is and is highly useful.. Of course, if you get too anal about it, it can drive you nuts, too.

  • MarkKelling

    Of course Target has ways of justifying and absorbing the 5% discount. It is built into their pricing. They push it heavily in their marketing.

    TD Bank also has to be making enough on the overall relationship so they stay with it. I have not seen any numbers, but I’m sure the entire number of cards is fairly significant.

  • MarkKelling

    Yes, the Target 5% is a DISCOUNT off your bill at purchase time for anything you purchase at Target and only at Target. No cash back. No statement credit applied at a later date. The card issuer never even sees the full amount of you bill, only the post discount (and post coupon) amount. And I agree that 5% is not much in the overall scheme of things from the company’s viewpoint.

  • mbods2002

    I use Credit Karma, seems to be OK. Once a person understands what goes into the score, it’s pretty easy to manipulate. That said, I’ve always tried to protect my score but a few times circumstance has made it drop (broken lease, layoff from work, you know). Many more doors open with a good score, I’ve found, so I’ll keep at it ! :)

  • Michael__K

    For it to scale to higher volumes there has to be a profit margin at the individual-customer level first.

    The bank could make some money from cross-selling. But to the extent they can identify sub-sets of customers who have no cross-selling upside, for those customers there’s a zero-sum game between the bank and the merchant. The better the relationship is for the bank, the worse it is for the merchant, and vice versa.

  • Harvey-6-3.5

    If you use a cash back credit card and pay it off in full every month, you get a percent back and the Credit Card company makes money from the stores at which you’ve made purchases.

    Once you have enough credit cards, a mortgage, etc., I recommend that you freeze your credit (for about $30, $10 with each of Experian, Transunion and Equifax). That will prevent fraud under your name and, if you need credit, you’ll pay $5 or $10 to unfreeze one of the accounts (but I’ve done that two times in the last seven or eight years).

  • ChicagoAlli

    46 years old. Paid off credit cards in full every month my entire adult, credit card holding life. Constantly have my current cards’ limits increased to levels way beyond anything I would ever use.

    Maybe an event unrelated to the Target card cause the credit decrease? Maybe the lack of usage of the card caused the credit decrease (I have had department store cards go inactive after a lengthy period of non-use, so maybe a similar situation)? Maybe just a random mistake? Why the “go nuclear” conclusion that it is some great conspiracy by Target to punish people who pay their bills in full? Makes no sense and frankly erodes the credibility of this site to advocate for real disputes.

  • kittymocha

    My score is over 800 and I pay off monthly the 2 cards we use. There is no mortgage on either our house or condo in AZ. I’m very careful about debt since I saw my Dad who was so careless that he never had a good rating. We are in our late 60s, mid 70s and refuse to take on a lot of payments.

  • Asiansm Dan

    If you are on the path for retirement, get rid of your credit card debt is the priority One. It’s the biggest obstacle that refrain people chose the moment they decide to retire and it affect enormously the quality of life during the retirement.

  • jim6555

    I have a $2,500 limit on my Target RedCard. I’ve had the card for almost four years and never spent more than $75 in a month. Since the balance is paid in full each month, Target has not made money from the potential 22.9% interest rate that would be charged if I maintained an outstanding balance. Thus far, Target has not lowered my credit limit.

  • joycexyz

    Why do you so often ask us to vote on questions that sound like “Do you still beat your wife?” A lot of issues are not either/or, but rather “it depends.”

  • El Dorado Hills

    I concur with joycexyz. Chris, sometimes you give us voting choices neither one can we really answer. I think a little more thought needs to be put into the wording of the voting questions. Credit cards have a definite place in our society today and if they are used properly they are good. I don’t think we have the full story here as I, like so many people commenting below have said, pay off all my cards each month and have never had a problem. They card companies are making their money off of the fees the merchants are charged.

  • Tim Mengelkoch

    I have paid off my credit card balances in full automatically for over 20 years. These balances have run in the low thousands. Target’s have in the $500 range. Nobody has ever cut my limits so I find this story odd.

  • jsn55

    Not much she can do? How about finding out what happened? Contacting Target to ask them? Something odd with this story.

  • cscasi

    Can only speak for me, but I paid my mortgage off a long time ago and my credit score has been above 810 since then (actually 830-833 this year).; 2006. And, I have gotten several new credit cards during that time. I did not see a big drop when I paid off my mortgage. I have no credit card debt and the only loan I have is the leases on my vehicles since 2006.

  • cscasi

    There are variations in the correlation as they each have their own algorithms. That is why when you check your credit scores from the three credit bureaus by either paying for them or using credit cards that allow you to see the scores every month, you will notice that all three scores are different. It’s been that way for years.

  • sirwired

    She should check her credit report (assuming she doesn’t already know of a reason Target might drop her limit); it’s pretty routine (and prudent and reasonable) for companies to reduce limits if they think your default risk has gone up.

    Certainly I’ve always paid my cards in full, and I’ve never, with any bank, had them reduce my limits. (If anything, my limit goes up from something higher than I’ve ever used to something even more.)

  • DChamp56

    That’s the wrong question. It should be Do “non-bank related” credit cards suck.
    Those being cards from stores. And yes, they do suck.

  • AAGK

    Credit scores are worthless indicators. This is the first time I’ve heard of a company slashing a limit bc of nonuse. I would be skeptical if Target didn’t admit to this ridic practice. I assume the slash is intended to motivate folks to return and spend. Guess what Target, a move like that would just make me cancel the card and never enter your store again. What would someone do with $200? Since this lady already faced the credit score decrease then I hope she closes this card and tells Target to shove it. Finances ebb and flow. Sometimes people have a bad year and don’t spend as much. How shortsighted of Target to not realize that same loyal customer may return to their former spending habits a few months later. We don’t have one in NY so I’ve never been but after this story, I would avoid.

  • AAGK

    The algorithms are so in flux that no one can rely on their good credit score. I have had a credit card since I was 15. I’m now in my 30s. Imagine my surprise when some sort of formula changed and Equifax deemed me “new to credit” and suggested I become an authorized user on someone else’s account. Thanks but no thanks (not to you, but to that advice). You are lucky but it’s not so simple. Fortunately, I’m not seeking a mortgage, etc so I don’t really care but I would if I wanted to upgrade.

  • AAGK

    That’s a good point. She may be incorrect as to the real source of the reduction. That’s another issue with credit scores- credit issuers can be cagey or vague about the real reason. I read an article once by a former back office Chase employee that says it puts folks in 3 categories: worthless (pay in full every month and don’t generate income), spenders who pay a lot of interest but on time, and “deadbeats”. Guess which it loves the most and will bend over backwards to accomodate?

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