Lenders Lower Spending Limits on Select Credit Card Holders
FICO announced last week that while the lowering of spending limits by lenders may dramatically affect some card holders, the effort had little impact overall on credit scores.
Nearly $100 million dollars of bad credit card debt is projected to be charged off in 2009 as consumers default in record numbers. Lenders are countering by tightening their standards, increasing rates, and increasing late penalty charges. Accounts are being terminated without notice and credit limits ratcheted down even on customers who have a clean record.
While the average decrease in spending limits has been $5,100, credit card holders have been shocked to see credit limits reduced as much as 75% with no warning and with seemingly no cause. Accounts have been closed as well without prior notice. Consumers have been caught unawares, sometimes embarrassed, and sometimes angered by these actions.
Lending institutions have learned that consumers who have used a high percentage of their available credit balances are more likely to default than those who pay off the balance, or nearly pay it off each month. The lenders also recognize that consumers who have one or more late payments may be more prone to become delinquent as well. The lending institutions are taking aggressive action now rather than waiting for these consumers to default in the future.
33 million consumers had their credit limits dropped for the six months between October 2008 and April 2009. Of these, 24 million had no negative entries on their credit reports to justify the decrease.
The FICO study suggests that instead of using a shotgun approach to lower limits and close accounts the lenders are being more precise. “Our study suggests that lenders are using a scalpel and not a hatchet to trim their revolving credit exposure and meet their requirements for regulatory capital,” said Dr. Mark Greene, CEO of FICO.
Lower credit limits and involuntarily closed accounts can have an impact on the debtor’s credit score. About a third of the 24 million consumers, who had limits lowered for no apparent reason, also had their credit scores drop. However the drop was under 20 points. Nearly half saw an increase in their rating, but that may be as a result of their own efforts to pay down balances.
What can a credit card holder do to prevent their account from being limited or closed? The first action is to be proactive. Paying down the balance to below 70% of their credit limit is one option. Another is making payments on time. And a third is not depending on credit cards as an alternative to cash on a regular basis but rather as a convenience for purchasing.
Unfortunately it seems the credit card environment is going to get worse before it gets better.
Tags: Credit Card Debt, FICO, Late Payments, lower credit limits
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