Banks Trimming Limits for Many on Credit Cards

[Pale Blue Dot]

Source: NY Times

The easy money that led Americans to depend on credit cards to pay their bills is starting to dry up.

After fostering the explosive growth of consumer debt in recent years, financial companies are reducing the credit limits on cards held by millions of Americans, often without warning.

Banks that issue cards like Visa and MasterCard, as well as the American Express Company, are cutting the limits for customers who have run up big debts, live in areas that have been hit hard by the housing crisis or work for themselves in troubled industries.

The reductions come as consumers, squeezed by a slack economy, a weak housing market and rising unemployment, are falling behind on monthly credit card payments in growing numbers.

Credit card lenders are also culling their accounts ahead of new rules that are intended to benefit consumers but could limit the profits on customers deemed bigger risks.

Read more: http://www.nytimes.com/2008/06/21/business/21credit.html?_r=1&partner=rssnyt&emc=rss&oref=slogin

[Tab]

1. I just had someone (Lowe's, maybe) cut mine

We weren't late or anything, they just did a "credit review" and decided to trim our credit out of the blue. I've never had any company do that before. Apparently they're just trying to eliminate any future risk.

I don't think they should be doing that unless you're in default, but then again their extension of credit represents risk for them and I guess they can decide how much they can afford to extend. It may not be a reflection on me at all, but rather a reflection that they're doing poorly, and have decided that THEY are overextended, although they make it sound like it is ME that overextended.

[JerseygirlCT]

2. Well, I think that's it - they're realizing that what seemed a

savvy marketing ploy - extending all sorts of credit to people, and then collecting the interest - has started to backfire on them. So it makes sense to me that they'd start reeling things in a bit.

But I dislike the no warning part. I'm one of those people the cc companies probably don't like - pay it off every month without carrying a balance. But for someone who has needed to do that - how do you plan if suddenly your terms change without notice? I think they ought to be obligated to offer notice, in writing, of any change in terms.

But I do think they've been offering far too much credit with far too little consideration of the person's ability to pay. Safer to have smaller limits.

[pagandem4justice]

11. While I do agree...

that it's safer to have smaller limits, they should start with *new* cardholders, not reduce the limits of existing cardholders without warning, thereby giving themselves "automatic" over-limit fee benefits, and giving the cardholders nothing but despair. :(

[JerseygirlCT]

13. Oh, that's why I think there absolutely need to be

rules in place about warning - timely and in writing - before those changes can be made.

[pagandem4justice]

3. Additional revenue!

Look at what the companies get from this...it's not a smackdown to consumers, it's not about "easy credit"...it's about them trying to recoup some of the money they're losing from people who can't pay their bills, or who are discharging their debts through bankruptcy -- IF I have a $10,000 balance on which I make minimum payments, and the company drops my limit to $5,000...I am now being charged additional interest and "overlimit" fees for the other $5,000!

[jmowreader]

4. Even if you're sending them $1000/month, they can still charge you that

[pagandem4justice]

5. Well, let me clarify.

You're absolutely right, *if* you were already over your limit. They will still charge you that. But what I'm talking about in this new(ish) situation, is if you're *not* over your limit at the hypothetical $10,000 because your limit is, say, $11,000. You're staying below the limit and making your payments on time. Granted, you're never paying it down due to interest, but you're "floating." A sudden reduction in your credit limit, though, puts your not just a "little" over the limit, but by thousands. Imagine the despair.

The reason I said "newish" btw, is because I experienced a similar tactic to this many years ago, at the hands of Capital One. I was not completely innocent, as is the person in my hypothetical example above...I actually did go slightly above my limit of $4500 due to sudden homelessness and other personal crises which hit all at once...but when I missed two payments, the company not only charged me fees (which they were right to do), they reduced my credit limit to $1500...putting me approximately $3500 over limit, and at an interest rate of 24% (high back then) and at my new minimum wage, part time job, had no hope of paying off.

[Tab]

8. I've been curious about that

I don't know exactly what we owe - my wife usually deals with that (I just have to bring home the bacon) - but if I owed, say, $1000 on a $1200 limit, and they cut me to a $500 limit, can they start charging me overages? That seems like they'd be just begging for a class action lawsuit. Guess I'll have to wait for the next bill to come in.

[pagandem4justice]

9. Yes, they can. (Supreme Court Case)

They can, and they will.

In a unanimous decision authored by Justice Thomas in Household Credit Services, Inc.
v. Pfennig (Apr. 21, 2004), the Supreme Court stated that "over-limit fees" are penalties for exceeding the credit agreement. According to every credit-holder's agreement, the terms of the card belong to the company, and may be changed or withdrawn at the will of the company. In other words, as holder and "owner" of the asset (the credit), the bank may control or change the credit agreement at any time. Ergo, if the company adjusts the limit downward, they can assess any penalties that therefore apply.

In other words, be *very* careful.

[Tab]

12. "and at an interest rate of 24% (high back then) "

Actually, I consider 24% high even now. If 24% isn't high right now, what is? Not saying THE highest, just "high" range.

I'm still trying to figure out what happened to the usary laws.

- Tab
(wishing I was high right now. Alas, it's been 20+ years since that happened)

[jmowreader]

17. You didn't need to clarify. I understood.

I think a LOT of people are going to run into that in the next few years. The real money in the credit card industry is what we'll call "abuse fees"--not fees the creditor uses to abuse the debtor (you could call them that too) but fees the creditor charges for the debtor abusing the account. Late fees, overlimit fees, excess transaction fees...and of course the instantaneous raising of the interest rate if you fuck up even once and even if the fuckup wasn't on their card. You were one day late paying your water bill? Forty percent interest for you!

And the quickest way I can think of to give EVERYONE an abuse fee is to run credit card balances on everyone, then reset everyone's credit limit to $1000 below their balance.

[surf]

6. Credit cards are not FREE MONEY!

This is actually a good idea. Spending more then you can comfortably payback is a big problem with people today. Just look at the housing market. Youre not supposed to live off of your credit cards. Its a hard lesson to learn, but this might help some people.

[pagandem4justice]

10. Wow, great tactic.

Offer people a line of credit for which they *qualify*, wait until they count on it as part of their budget (hey, even corporations count available lines of credit and outstanding debt as assets!), wait until they *use* that credit, then withdraw it suddenly...and blame the consumer??!!??

Nice. Compassionate.

:sarcasm:

[JerseygirlCT]

14. Well, but where's the consumer's responsiblity in this?

To understand their own limits? To understand that they shouldn't over-extend themselves?

You seem to think the credit companies should have been the sole arbiters of how much any given consumer *should* spend. And that when the credit companies change their minds about that amount, it's all their fault. Where's the fault of the consumer, who willingly used every bit of that too large credit limit to make purchases beyond their ability to pay?

I know I've never, ever come near the limit on my card, and I never would. If it can't be paid with the bill - in full - I shouldn't spend it.

Now, I know there are catastrophic situations. And honestly, that's why we have cards. But those are NOT the norm. Catastrophic situations are not the majority of overextended credit consumers.

The consumer absolutely has the first responsibility to keep their own spending within limits they can afford. Credit companies are not the ones who should be making that decision.

[Dreamer Tatum]

19. Horseshit. Pure horseshit.

I don't like the credit card issuers any more than you, but COME ON.

How many hundreds of threads have we had about greedy lenders forcing money down our throats at exorbitant rates, yet NOW
it's a problem when issuers claw back on credit limits?

Damned if they do, damned if they don't...

[justaregularperson]

7. No problem with this except that it screws your credit rating. Need to change that system

All of a sudden a responsible borrower could have their credit to owed ratio sliced, and there rating could drop significantly.

[JerseygirlCT]

15. Yes, that's true, too

In general, I don't have a problem with this. But there are a few kinks here, and a person's good rating shouldn't be affected because the cc company made a change.

Doesn't carrying a large credit limit on your card, whether you wanted it or not, adversely affect your rating too?

[eilen]

16. Working for the Clamp-down(long)

When you sign on the dotted line you are agreeing to their terms and conditions which they state are subject to change over any and all vague information that they may discover during credit reviews which they do pretty often.

These are not loans that you sign for from your bank with a discrete time period and fixed interest rate which is often secured by an asset (a car loan) or guaranteed by the government --like a student loan or FHA mortgage. Using credit from a credit card with the perception that this is available go-to funds for budget shortfalls is akin to getting money from loan sharks.

When you pay a credit card off, you should cut it up and cancel the account. Eliminate your access to it if you have been accustomed to using it because that is what it takes to get off the drug of easy purchasing. That means:

Getting low on gas with limited funds, you can't buy more gas, you have to buy less food or decide to pay a bill a week late and re-budget or figure out how to get to work on less money. By now if things are this tight, you are not driving anywhere but to work and back. Some people might have to use a sick day instead. Renegotiate your daily schedule and determine how to commute without driving everyday, --carpool, park and ride, etc.

You might consider selling your home and renting closer to work. Or, you might consider finding a different job closer to home. This is a macro economic decision, it requires planning and a lot of thought. Not to be done quickly.

Also try and find some grassroots and homegrown ways to generate extra income and/or barter for services. For example, my son enjoys a weekly art class. I bartered with the art teacher and manufactured some banners for her business in exchange for one month's fees. We also share rides, I will pick up her son and bring him in, she will drop off mine after class.

Cultivate a hobby that can enable you to make money to either perpetuate the hobby or barter for other stuff. I know a lady that loves to knit and create gorgeous sweaters and she sells them on consignment at a yarn shop for more yarn. I know a man who brews his own beer and wine and gives it as his holiday gifts and trades it for fresh garden produce from a neighbor who tends his own backyard vegetable garden. He has since opened a shop selling the materials for other hobby enthusiasts.

Review any automatic renewable subscriptions and review if you are using them and can still afford to maintain them--gym memberships, online games, cable channels, daily newspaper, etc. Any service that is now doing auto payments from your credit card.... cancel.

Whatever it is to get away from credit cards and owing a balance, I would recommend doing it. Even if you pay it off every month. It just takes one month for them to decide you are paying late (they don't look up the EFT transfers on time) or one economic disaster (such as losing a job or getting really sick) to fall into credit company hell where the rules are stacked against you.

I would recommend watching the movie "Maxed Out". Even if you are not one of the credit company victims, if you continue to use them, you are participating in a system that is grossly unjust and hurts people and manipulates our government. It does not take much to be in debt-bondage. I really believe that credit card debt is a method used to control people and our government, employers/corporations, telecoms and the insurance industry are in collusion.

To answer your question, Yes. The available credit that you have can adversely affect the ability to take a car loan or mortgage as it is considered that you may take advantage of that large amount of credit and thus decrease your available funds to pay the loan you are applying for. The FICO score is only important if you want to borrow money for something.

However, a credit report is often requested by some large companies for hiring decisions. Personally I would not want to work for anyone who felt they needed to be that intrusive in my life to hire me to work for them. Also, in some cities, it can be difficult to rent an apartment without allowing their property management to check your credit; nice way to control people, make them toe the line. Mostly everyone's credit report has false information on it which is extremely difficult to correct and the credit scoring agencies accept no fiduciary responsibility in keeping these accurate; except for an elite group of mostly lawmakers and A-list celebrities--theirs are checked routinely to keep fake information off as they are most likely to make a big public legal case out of it. This makes character assassination of any regular American citizen fairly easy to do.

If you tend to carry a balance on your credit cards, I would recommend Dave Ramsey's book "Total Money Makeover". Again, I have no connection with him nor the Maxed Out movie, they both opened my eyes. He also has a website, just google his name. His methods have been very useful to me.

If I sound very passionate about this it is because I have some credit card debt I am paying off (about $3,500) after being at balance zero for a long time. It took getting rid of the cards and it is still a struggle to careful not to just make purchases because that is what I was used to--not really worrying about money when I worked full time. Most of the balance came when we had three major expensive car repairs that we put on the card but could not legally drive our vehicles without them but I also used the card for some shopping. Now we are living on about $40,000 a year when before it was over $100,000. It requires a big adjustment in behavior and it is not easy! I did not grow up like that, we never went shopping and did not have credit cards. We never took vacations away from home and received clothing twice a year (school time and spring-for tshirts and shorts). We only received toys and games at Christmas and on our birthday. Grocery shopping was once a week only and when we ran out, we ran out.

Also, I have a close relative who is in big debt trouble and I feel very badly for her.

[JerseygirlCT]

18. Those are a lot of good suggestions

I'm not giving up my credit cards - I dislike ATMs and carry cash for most weekly needs, but like the cards for those bigger expenses (medicatons, gas!). We've always paid the card off monthly.

But the other suggestion I'd make to people with children is teach them early on to be careful and financially responsible! My spouse and I both have the same outlook - except for our home, it's don't spend it if you don't have it. But I've seen so many people who simply don't think about it - it would leave me in a state of terror to live as they do, personally! They're putting themselves in a spot where a job loss, a big medical problem - any big unanticipated change - would mean absolute financial ruin. I think kids would benefit from some education about smart spending and savings to counteract the widespread notion (fostered by those eager to encourage our consumer culture) that spending is good, and credit is free money.

[eilen]

23. Banks used to encourage savings

They had student accounts, I had one, we brought a dollar every week for our student bank accounts. My mother used to have a card they would fill with quarters --one each week, then turn into the bank when it was filled. Banks used to offer gifts as inducements to opening up savings accounts. There was an entire culture that encouraged savings. Representatives of banks used to hand out sewing kits, measuring tapes, notepads, pens etc. We would get a sticker or a promotional stamp whenever we handed in our passbooks with a deposit as kids.

They ended up changing the desirable behavior to borrowing, I guess because they made more money that way. They started charging big fees to keep an account to discourage saving. Now, when you put your money in a savings account, you lose money as inflation has a higher rate than the savings rate. Gas is going up up up, the dollar keeps shrinking and interest rates are 3% or below.

[ThePowerofWill]

20. They recently cancelled my card.

Never had a late payment ever. The problems was i only used it in a rare emergency, or to keep it active, and paid any purchase off at the end of the month. They could not, or were not making money off of me so i got the axe.

[JerseygirlCT]

21. Yes, I imagine we're not their favorites, either

we use them - so they get the merchant fees. But always pay off - so nothing from us.

[Wcross]

22. My one & only card increased my "limit" from 15 thousand to 20 thousand.

They did it right after I paid it off. I don't plan on using it ever again but I am going to keep it open for now.