Credit Card Companies Slash Card Holder Credit Limits

April 16th, 2009 Filed under: Capital One Credit Card — Credit Card Author |

Has anything changed on your credit card statements? If no, consider yourself lucky. According to a recent Synergistics Research Corp survey, 21 percent of consumers reported receiving an interest rate hike, 17 percent reported an increase in minimum payment due and 9 percent had a decrease in credit limit. The actual results could be much higher because the survey respondents were people who actually realized there was a change. Many people mistake notices from their credit card companies as junk mail when in fact it was notification of a change in terms. As a result, most people find out about the adverse action after it has already occurred.

Issuers as a whole are reducing the risk in their credit card portfolios. They face the economic pressures of rising unemployment, charge-offs, increased lending costs and profit-cutting regulations that take effect in July 2010. Already, the average debt deemed un-collectable has doubled to 7.1% up from 4.6% a year ago.

According to a Federal Reserve survey of senior bank loan officers, about 35 percent of banks reported slashing credit limits for existing accounts. There’s no guarantee the same percentage notified their cardholders of the change to their credit line.

Regulation Z, which implements the federal Truth in Lending Act, doesn’t require national banks, such as Bank of America and Capital One, to give advance notice of a change in the credit limit. They don’t even have to notify you if the limit is lowered to or below the balance as the consumer pays it down, a practice called “chasing down the balance.”

In one instance, a consumer complained that she had made a payment to her card only to receive notice that she was over her limit. When she examined her online report, she found that her credit limit had been reduced to $300 less than her balance. She immediately paid an additional $300 so the “over limit” item would not be reported to the credit reporting agencies.

Minimal protection is on the way. Under the Federal Reserve Board’s new rules that go into effect July 2010, the issuer is going to be required to give the consumer 45 days’ notice before lowering their credit limit to the point where they could get hit with a fee or penalty rate. It’s safe to assume that the issuers will do as much chasing down the balance as they can before the July deadline. Even with the new protection, the issuer only has to tell the consumer if the reduction in credit line will result in an additional fee

For now, no federal law restricts the practice. National banks can ignore state laws containing language to the contrary. With the credit card market dominated by a handful of national banks, the burden is on the consumer to check statements or set alerts for balances nearing the credit limit.

Aside from the fees associated with being over limit, the action can also impact your credit score both as an adverse action and by increasing your debt to available credit ratio. That ratio accounts for 30you’re your FICO score. A steep drop in score can then cause a domino effect, with other issuers making adverse changes to your accounts.

Now here’s a really odd policy. The issuers make it more difficult for the consumers by reducing lines of credit, but if they have pushed you too far, and you have other financial hardships like unemployment, and you are having difficulty making the minimum payment, they are willing to work with you. In order to be considered for their hardship programs, you have to communicate with them, they aren’t going to volunteer the information.

Silence proves bad for both issuer and cardholder. As a rule, if the rates and minimum payment have gone up but you can still afford it, don’t call the issuer. They may see an opportunity to slash some more from your credit line. If however you have other circumstances and you can’t make the minimum, call and get a plan that will allow you not to default.

Chris Smith is a contributor to the popular consumer credit site http://www.trycreditfix.com/ where you can find other articles on understanding your credit reports, disputes, budgets and other articles of interest. Don’t miss the video by SNL on a very basic financial lesson “Don’t Buy Stuff You Cannot Afford” It’s a classic.

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Credit Card Companies Slash Card Holder Credit Limits

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