As credit cards issuers position themselves to prevent further long-term losses originating from the sub-prime mortgage mess, card holders should prepare for the possibility of some unwelcome changes in their credit cards.
Card issuers are tightening their lending standards, even with consumers who have responsibly managed their debts in the past. Your FICO score and whether you have the income to support your debts have long been the main considerations in granting credit, but that's changing now.
Some credit card users may have recently noticed that their credit card limits have already been reduced. This change in their credit cards' terms may be especially surprising for those who had thought that they were in good standing with their card issuer. But rather than only using conventional methods to determine whether a consumer remains credit-worthy, creditors have begun to focus on other factors that may also affect a consumer's ability to pay their debts.
They've been reeling in credit limits on consumers that they believe may be at risk for default in this suffering economy. And it may not even have anything to do with how you've handled your account with that particular card issuer. If your other cards' balances are coming close to their limits, look out. Card issuers fear that card users who come perilously close to their limits on other cards may soon reach their breaking point. They're reacting by cutting limits now, rather than taking a risk that you'll max out all your cards, and then no longer be able to pay.
Credit limit decreases have also been handed out depending on where you live. Consumers may see a reduction in their credit limit simply because they live in a state that has been hit especially hard by falling real estate values, as residents of Florida, California, or Nevada are experiencing. With their primary asset losing value, many can no longer tap into home-equity lines of credit, and are turning to their credit cards more frequently, even for larger purchases. Card issuers are slashing credit limits, before consumers can rack up credit card charges for things they would have normally taken out a home-equity loan for.
A credit limit decrease may also be due to the fact that a cardholder's occupation is in a sector that has been affected by the sub-prime mortgage collapse, and the card issuer fears that they may lose their job. Some who work in the financial sector or construction industry have already experienced this type of discrimination by card issuers. But how far will card issuers take it? A suffering economy, depreciated real estate values, and a declining job market affects us all to some extent, whether we are a home-owner or renter, a banker or bartender, and whether we live in California or Pennsylvania.
And some card issuers have always responded to late payments, or payments made with a returned check with a credit limit reduction, though they may have been more lenient in the past than they are now. Late or missed payments send a red flag to creditors, and they may react quickly to prevent a cardholder from running up more debt. Creditors get nervous when even a single payment is missed; they know that every delinquent account starts with that first late payment. It doesn't matter if it was an innocent oversight on your part and you have thousands of dollars sitting in your bank account.
Many aren't even aware that their credit limits have been cut until their card is declined by the merchant they're doing business with. Or the over-charge is approved, as card issuers commonly allow, up to a certain point. Then the consumer doesn't even realize they've gone over their limit until they receive their next statement, with the customary over-limit fees tacked on.
Credit limit reductions may affect the way you spend on credit.
Even card users who responsibly pay the balance in full every month may be left with a card that can no longer cover all their monthly expenses. They might have gotten used to collecting rewards points or the convenience of one-statement billing, but this may become more complicated when one card can no longer do it all.
What now? Well, we can juggle multiple balances on multiple credit cards, meaning we'll have more numbers to keep track of. This means that there are more opportunities for forgotten payment dates and mistakenly going over the credit limit. So, to us, it means more fees for card issuers to collect.
And just as a credit limit increase can raise a credit score, a credit limit decrease can cause a credit score to drop, making it even more difficult for consumers to gain new credit with favorable terms in the future. Your credit-utilization ratio makes up a significant portion of your credit score, and using over 35% of your available credit limits put you in the high-risk category in the eyes of creditors. What has been long considered a reasonable balance can instantly become a high-risk balance when a credit limit is severely reduced.
Protect your credit and your financial well-being.
The big guys are doing what they can to protect themselves from further loss in this difficult economy. It's smart for consumers to do the same. We've allowed ourselves to become comfortable with our dependency on credit. And it was easy to do, before the sub-prime mortgage collapse. Credit card balances grew, balance transfer offers were everywhere, and home-equity loans were a source of funding when we wanted something bigger than our credit cards could handle or we needed to consolidate debt.
- Reduce your dependency on credit cards and get your balances down to a level you can pay off each month.
- Keep your credit score high; card issuers may periodically review your credit report, and may change your card's terms or limits due to changes in your score.
- Make all your payments on time; set up on-line bill payments through your bank so you never forget and miss the due date.
- Stay within your credit limit. Don't forget about automatic payments on your card or annual fees that may put you over the limit.
- Shop around for another card if you need to; not all issuers have the same policies. You're bound to find a card that suits you.
- Have an adequate emergency fund so that you don't have to use credit cards for unexpected expenses.