Credit Card Companies Slashing Credit Limits

The continuing subprime meltdown is leading jittery creditors to reduce cardholder credit limits at the first sign of trouble. According to a recent survey, up to 75% of banks are cutting credit limits to minimize their exposure to risk. The move can adversely affect credit scores, which are determined by considering the percentage of available credit used. From the Chicago Tribune:

A change can stem from late payments of any kind, a drop in your credit score or the addition of new lines of credit. Bryan found out limits on three cards were actually cut after he took out a home equity loan to pay off some debt.

“Taking out the home equity loan may have possibly been the factor that lowered the credit line,” Bryan said.

Consumer advocates say lowering limits is a better way to manage risk than hiking interest rates, but these cuts can lead to trouble if you are not aware and prepared.

“If you don’t know your credit line has been dropped, you could go over the limit. And, with most card issuers, that means you’ll pay a hefty over the limit fee,” Gerri Detweiler, a credit card expert, said.

Check your statements carefully to make sure your limit hasn’t changed. The best way to keep your current limit is to use credit responsibly. Pay your bills in full each month, and don’t take on debts you can’t afford.

Some Companies Lowering Credit Card Limits [Chicago Tribune]
(Photo: mojojornjorn)

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  1. doctor_cos wants you to remain calm says:

    Thank goodness that the banking industry is so tightly regulated so that they can’t screw over consumers at will…wait, what?
    Another way for “your” credit card company to “help” you not live beyond your means, obviously.
    Another wonderful part of universal default.

  2. stanfrombrooklyn says:

    Of course one of the ironies is that the same company that reduces your credit limit will benefit now by being able to charge you higher interest rate for a mortgage, home equity line, or line of credit. Citibank reduces your credit limit on your cards, lowers your credit score, and now can charge you higher interest on other loans impacted by a lower credit score.

  3. azntg says:

    On my last billing cycle, I recieved a letter sized paper from Washington Mutual Card Services, filled with small print and legalese with changes to the Cardmember’s Agreement.

    One of the more conspicuous changes, in short, was that Washington Mutual would not automatically raise interest rates if I’m at default with another non-Wamu creditor. However, they added a provision to decrease the credit limit at any time.

    To put it simply, if they decide to do that to me without any major justifications and put me in a precarious situation, they will be losing several accounts from me in one fell swoop. Ah, the joys and pitfalls of maintaining multiple accounts with one business.

  4. Trib had a follow-up article this morning in the Business section about how the market is really bifurcating and people with bad credit are finding credit is drying up, while people whose credit is still good are being inundated with offers (more than in the past) to make up for less lending in the sub-prime markets.

  5. andrewsmash says:

    Gee, it’s nice to see that banks are making

  6. andrewsmash says:

    Ok, that was weird, the comment auto-posted.

    I was going to say that – it’s nice that the banks are starting to realize that extending unlimited credit to people making normal wages leads to a situation where they don’t get any money back (at least until they convince the government to reinstate debtor’s prisons.)

  7. Bryan Price says:

    Hmm. Our card just got increased 2k. Of course, it was the second time that we bumped our heads on the former limit (and we haven’t missed paying the whole thing off this year) plus our good credit.

    Of course, it took them a whole week to post our payment to the account. Normally I wouldn’t have noticed, but I needed to make some Internet purchases (of course!), and I don’t use our debit card for those. So that might have been a sop thrown our way.

    And I noticed from our statement that we crossed that old line again before the payment hit.

  8. @Bryan Price: “Of course, it was the second time that we bumped our heads on the former limit (and we haven’t missed paying the whole thing off this year) plus our good credit.”

    I actually have a question about this. We’ve never even come CLOSE to our credit limit on ANY of our cards; they’re generally 9 to 10 times the highest amount we’ve ever charged in a single month. The one we just got (changing companies) just issued us a credit limit identical to our highest existing card.

    Are credit limits normally pretty close to the credit you use, or normally more like ours, or is it just set at a particular number for people with credit score X and we don’t use much of it? Or is the multiplier determined by credit score?

    I’ve never been able to figure out why they give us so much damned credit.

  9. ebm says:

    Really nothing more than perception. This practice has been going on for some time now as far as the larger banks are concerned. Why should a bank increase your line of credit let alone extend you credit at all if they review your bureau’s and find you can’t even pay your other bills on time? It’s called risk management. If a bank receives your application and they find 5 other inquires on your bureau’s from other banks within a short period of time. That would make you seem credit hungry. Yet another possible risk. I could go on all night.

    Bottom line..
    1. Pay your bills on time. NEVER be late on a payment.
    2. Keep your balance under 50% of the actual credit line at all times.

  10. tentimesodds says:

    This is FUD. You guys should be ashamed of yourselves. The MBS market is coming back–the “subprime meltdown” is yesterday’s news.

  11. FLConsumer says:

    @Eyebrows McGee: Did you get a credit card through your bank/credit union? The only cards I hold are through my bank, so I’m assuming they took a look at my accounts with them, credit report, and went from that.

    I’d probably have a difficult time getting a card from Capital One / the other non-bank type places. While I have a healthy, but terribly complex financial portfolio with plenty of reserves, the question “How much is your annual salary?” is a difficult one for me to answer, primarily because the answer is so complex.

    Also, some people get credit cards while in college / working a lower-end job and their income isn’t all that high. When they get a new, higher-paying job, their new income isn’t reported to the credit agencies. If they never request credit increases, the credit card issuers won’t ever know of their improved income, and they’ll be stuck with their lower limits (and lower credit score if they’re using quite a bit of their available credit.)

  12. @FLConsumer: “Did you get a credit card through your bank/credit union”

    No; my first was through FNBO, my latest through AmEx. (My husband has Discover and we had a joint MBNA but just bailed on that (in favor of AmEx) when BofA bought it.)

    I did get my FNBO card in college, and the credit limit on it is somewhere around $10,000. I’ve never charged more than about $1000 on it, the month I got married, and before that usually $200-$300 when it was my primary card (and anymore most months I charge $100, if at all, just to assist with accounting by keeping certain purchases separate and because I’ve had very good experiences with the company, so I like to keep the card as a backup). They just kept raising and raising my limit every couple of years. (And to be honest, I’ve never made that giant a salary personally since I’ve mostly done public interest work, been self-employed, or worked as an adjunct.)

    Our MBNA card, when we were both still in school and had NO income, had a credit limit of $15,000. Again, started out when my husband got it at a couple thousand and they just kept raising and raising it even though our charges have stayed constant and never been all that high.

    I’ve really never understood where these credit limits come from. They do seem to ceiling out at about 10 times the highest amount I’ve ever charged in a single month on that particular card, but the increases seem totally random.

  13. anatak says:

    “According to a recent survey, up to 75% of banks are cutting credit limits to minimize their exposure to risk.”

    Risk? Risk? Lenders now have no way to evaluate risk, so they just raise and lower their exposure based on the wind? Nice.

    @Eyebrows McGee: “I’ve really never understood where these credit limits come from.”

    Imagine them striking a balance between how much they think you can handle and and what would cripple you…. and then adding 50%. They’re baiting you, just hoping that you’ll make some colossally stupid mistake, like buying a car on credit cards. Kinda like a snake just lying in wait for the right opportunity to sink its teeth into your ankle.

  14. Coelacanth says:

    Still, I have to wonder… if the wisdom is to keep balances under 10%, (or a worst-case scenario of 50%), then what’s the point of a credit limit at all?

    Banks allow people to approach their limit, but severely penalise those who take full advantage of their “right.” Seems a bit deceitful to me.

    Yes, I’ve had some credit limits lowered on accounts that I’ve paid on-time every month. My payment history is flawless and I haven’t opened any new lines of credit in over a year.

    I try to pay off my balances, but my credit limits and credit score just gets worse.

    Good thing I’m not in the market for a mortgage anytime soon.

  15. AimeeBullfinch says:

    We just got a letter from Citibank saying they were lowering our limit to be more in line with our usage. We’ve never been late and pay our balance in full every month. The only reason we got the stupid card was for 12-months no interest on some appliances from Sears a few years ago. So this is how they reward the people that actually pay their debts!