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Tougher credit rules for consumers
By Eve Mitchell
STAFF WRITER
Article Launched: 11/10/2008 05:58:08 AM PST
While it is becoming common knowledge that the days of easy home loans are long over, so, too, are the days of easy plastic.
Many of the country's major credit card issuers are reducing credit limits, increasing interest rates for some customers and sending out fewer applications for new customers in response to tougher economic times and rising default rates.
Bank of America and Capital One are among the major lenders that have tightened up credit requirements for Visa and MasterCard cardholders. American Express and Target have also rolled out stricter requirements for their cards. Although careful management of credit cards has always been important, it is even more critical at a time when card issuers are cutting back on credit, said Bill Hardekopf, chief executive officer of www.lowcards.com.
"In this environment, particularly now, do always make your payment on time and pay as much as you can. Don't do anything to increase your credit risk. Don't be late on your payment. Don't exceed your credit limit," he said.
Miguel Flores was pumping gas when his American Express credit card was rejected in July after the purchase went over a spending limit that he said was lowered days earlier without his knowledge.
When Flores called American Express to complain, he was told his shopping patterns, which include trips to a discount grocer, made him a credit risk and so it was therefore necessary to lower his credit line.
"They said based on places I was shopping, I was a risk for them and would not be able to pay them back," said Flores, adding that American Express reduced his card limit from $6,000 to $4,400.
The Campbell resident said he always paid his bill on time in an amount that was well over the minimum payment requirement. "I never failed to make a single payment," Flores said.
American Express said it cannot comment on individual cases but did say many factors are considered when credit limits are raised or lowered and that notification is provided ahead of time to the card holder.
"We continuously look at lines of credit we offer card members and are reviewing them on a case-by-case basis," said spokeswoman Lisa Gonzales. "There is no one factor that determines our assessment of someone."
In a typical year, less than 20 percent of American Express cardholders will have their credit lines adjusted. And in cases where adjustments are made, four out of five cardholders get increased lines. That mix started to change in mid-2007. While the figure of less than 20 percent still stands for cardholders who have has their lines adjusted. Among those affected, about half are seeing their lines lowered and half are seeing their lines raised.
Having your credit line lowered can lead to a lower credit score, said Joe Ridout, spokesman for San Francisco-based Consumer Action. For example, say you had a card with a credit line of $5,000, and a running monthly balance of $1,000, which works out to a conservative 20 percent utilization level. If the credit line was lowered to $2,000 and there was $1,000 monthly balance, the utilization level would jump up to 50 percent, which could lead to a lowering of your credit score.
"It gives the impression you have been a risky borrower," said Ridout, adding that in the last few months Consumer Action has seen a five-fold increase in consumer complaints about reduced credit lines.
Consumers should try to spend no more than 30 percent of their available credit card line, said Ben Woolsey, director of marketing and consumer research at www.creditcards.com.
The cutback in credit availability comes at a time when the ability of consumers to take out home equity loans has been significantly reduced due to falling home prices.
The Senior Loan Officer Opinion Survey found that 67 percent of participating banks in the second quarter 2008 had restricted lending by one or more of the following actions: cutting credit lines, raising interest rates, increasing minimum payments, tightening terms and conditions on existing cardholders and increasing minimum credit scores for new cards.
Credit is getting tighter in response to more borrowers defaulting on their credit card bills, which leads to financial losses in the form of charge-offs for banks and other card issuers, according to a report released last month by Innovest Strategic Value Advisors, a financial research firm.
"A steady build-up of consumer indebtedness, deteriorating economic conditions, and a sharp reduction in consumer credit resulting from the credit crunch will cause charge-offs to rise dramatically in the next year," the report said.
Bank of America has tightened underwriting criteria across its credit card portfolio.
"On existing accounts, we may adjust some customers' lines based on their risk profile and performance with us. This is not necessarily a new practice, but we are taking a more aggressive look at accounts to control risk given the current environment," bank spokeswoman Betty Riess wrote in an e-mail.
Capitol One is also making adjustments on a case-by-case basis.
"Capital One routinely reviews our accounts to determine if there is a reason to raise or lower an existing limit. Like all issuers, we've been closely managing lines and that's meant some decreases in the current environment," spokeswoman Pam Girardo said in an e-mail.
Credit card issuers are likely to get even stricter in the coming months, said Ken McEldowney, executive director of San Francisco-based Consumer Action.
"Now is not a good time to take out a new credit card ... If someone has a high balance, it's sort of a red flag for the credit company, " he said. "Almost in self-defense, the credit card companies are going to reduce credit card limits and increase interest rates. In some ways, it's the same thing that happened with mortgages. The credit card companies extended far more credit to consumers than was probably wise."
Even if a credit line has been reduced or an interest rate increased, it doesn't hurt to call up the card issuer and complain, experts advise.
If that doesn't get results, "you can ask to close the account, that usually gets their attention. They will send you to the retention unit. Those reps are commission-based and paid on how many accounts they can save," said Woolsey. However, issuers may be be less willing to make adjustments compared to previous years.
"They may be under pressure to not do that as much for people who have less than perfect credit scores. Banks are trying to hang on to their best customers and let their less profitable ones go," he said.
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