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| Credit Answers > Debt-Management-Articles-2008 > Banks Reduce Credit Limits |
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Recent news indicates that credit card companies may be reducing credit limits on consumer accounts in response to the troubling economy. Consumer Action, a non-profit consumer
advocacy organization, conducted a study this past summer entitled, "Consumer Action's Credit Limit Survey." According to this survey, 18% of the 1,083 participants revealed that
their credit limits had been lowered by their banks this year. Consumers that plan to apply for new loans or credit may also face more stringent guidelines. A July 2008 Federal
Reserve Board survey indicates that 65% of domestic banks had tightened their lending standards on credit card loans during the previous three months.
Is This Good News?
For years, many credit card companies have enticed consumers to spend by increasing credit limits and charging a relatively low minimum monthly payment. The convenience of
credit cards have allowed some consumers to charge luxury items they would not normally buy with cash, cover emergency expenses, or pay for necessities such as groceries or
gas during tough economic times. Shrinking credit lines could be viewed as a positive step in the right direction as many consumers may be required to live below their
means.
Credit Card Companies Prudent In Making Credit Decisions.
According to Consumer Action's 2008 Credit Card Survey, customer service representatives at six well-known financial institutions told surveyors that they would reduce
cardholder's credit limits because of perceived customer risk. Factors included a decline in cardholder credit scores, late payments, and balances that go too close to the
credit limit. This practice is not necessarily new considering that some credit card agreements have a universal default clause, allowing companies to raise interest rates or
reduce credit lines if information contained in a consumer credit report suggests a possible credit risk. However, according to a recent Bankrate article, many lenders are
also lowering credit limits for non-traditional reasons such as whether the consumer has a sub-prime mortgage or if they live in a state that has been adversely affected by
the housing crisis.
Why now?
Any individual or family that has experienced a crisis situation may have discovered that difficult times sometimes inspire positive changes and bring families closer. The
credit industry implemented stricter policies regarding credit limits as a result of the crippling economy. But, what happens if the nation's financial circumstances improve
in the future? Will card issuers resort to their former lenient lending practices? Only time will tell.
Credit card companies are carefully assessing the risk and creditworthiness of cardholders and potential applicants. Regardless of the state of the economy, it is easy to wonder
why credit card companies would not have more stringent underwriting standards for applicants such as college students. Most undergraduates do not need a job or verifiable
income to apply for a credit card.
How does this affect me?
You may have limited access to credit while you are enrolled in a debt settlement program. When it comes times to re-establish your credit, consider applying for one or two
credit cards with low limits. High credit lines should not really be that much of a concern to you because it is wise to charge only what you can afford to pay in full each
month. If you notice that a credit card company increases your limit due to timely payments, resist the urge to use plastic for extravagant purchases. Overspending with credit
can easily spiral out of control and cause a dangerous cycle of debt.
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