The numbers, the anecdotes and even the credit card issuers themselves tell us they are cracking down on cardholders. Even those with stellar credit scores are feeling the sting.
Many card-issuing banks are trying to rein in risk amid rising delinquencies and charge-offs — and before pending legislation and regulations pass.
“They’re reducing lines, they’re closing accounts based on score cuts. I’m seeing data that says that even the higher score cuts — 750, 760, 720, in that range — that people are having trouble getting credit,” says Dennis C. Moroney, research director of bank cards at TowerGroup, a financial services consulting and research firm.
Since the third quarter of 2007, domestic banks have been tightening their standards for credit card loans — “tightening” meaning that financial institutions have restricted access to credit. In July, nearly 65 percent of U.S. banks reported a tightening of their lending standards on credit card loans during the previous three months, while only 5 percent of banks indicated as much in October 2007, according to the Federal Reserve Board’s latest Senior Loan Officer Opinion Survey.
The majority of credit card issuers are whacking credit limits. A July 2008 report from Javelin Strategy & Research found that 62 percent of credit card issuers are lowering credit limits to existing cardholders. Only 8 percent are increasing lines of credit.
The fact that banks are cracking down on some credit card accounts doesn’t surprise John Hall, spokesman for the American Bankers Association, a banking trade organization.
“It’s appropriate when the economy heads south that banks reassess their risk, the risk to the bank. And borrowers may see their credit lines shrink,” he says. When the economy is thriving, he says, lines of credit may increase because factors like widespread job loss pose a lesser threat to cardholders’ ability to repay.
We checked with Bankrate readers through our online newsletters to see if their credit limits had declined. Dozens wrote e-mails indicating that cards they didn’t use often got a credit limit cut, or were outright canceled.
We received a number of e-mails like this:
“My American Express credit limit just got slashed by $4,000 and yet I have high credit scores. I really didn’t care because I don’t use this card much,” writes Ron Niblett, of Newark, Del.
Representatives from several major card issuers confirmed that inactive cards as well high-risk accounts could wind up on the chopping block.
Issuers react to economic pressures
Representatives at American Express, Bank of America, J.P. Morgan Chase and Discover Financial Services told us how their companies’ credit card lending standards have changed over the past couple of years. Besides considering credit and application information, several mentioned that the company may look at nontraditional risk factors, such as where you live, whether you hold a subprime mortgage, spending patterns and behavior changes.
1. American Express: “Naturally we’re being more targeted in terms of managing our risk prudently within what we’re calling appropriate customer segments. This includes closely evaluating prospects, new applications as well as existing line assignments,” says spokeswoman Kim Forde.
“Some of the things that we might look at are the traditional things you might expect, like your American Express payment history, your credit bureau data, your reported income. We’ll also at customers’ spending and payment patterns. We are looking at other types of details, like those holding a subprime mortgage, those who live in geographies where there’s perhaps been a greater deterioration in home prices.”
Forde says no one factor overrides others but each contributes to the overall risk profile.
As for inactive cards, she says, “We will close inactive accounts where we’re seeing a change to the consumer’s credit profile since the time they obtained the card.”
2. Bank of America: “In response to the current economic environment, we have tightened underwriting criteria across our credit card portfolio and we continue to closely monitor the external market environment and review our credit requirements in light of changing conditions,” spokeswoman Betty Reiss wrote in an e-mail.
“On new account applications, we are looking at a range of factors, including FICO, and may refer some applications for judgmental review by credit specialists, particularly those from areas of the country that are experiencing more economic stress.”
“On existing accounts, we continue to closely monitor for risk and may make adjustments. For example, we may adjust customers’ lines of credit based on their risk profile and performance with us. We also are closing some accounts with zero balances that have been inactive more than a year. These are not necessarily new practices, but we are taking a more aggressive look at accounts to control risk given the current environment.”
3. Chase: “As a standard operating practice, Chase is always evaluating whether our customers’ credit lines are most appropriate for the customer and his or her needs, and will make adjustments accordingly — we may lower lines for customers who are showing signs of increased risk and we may raise lines for our most creditworthy customers,” Stephanie Jacobson, Chase Card Services spokeswoman, replied in an e-mail.
“As leading indicators began to change in early 2007, we adjusted our risk-management policies and procedures to better manage potential losses, including increasing our credit-score cutoffs for direct-mail marketing and increased the number of applications that go through the judgmental review process.”
“Chase closes inactive accounts based on our predictions of the probability that customer will activate and what risk exists with that customer.”
4. Discover: “Some specific changes we have made in response to the current economy include: reducing marketing into rising risk areas, suppressing automated line increases in riskier states and closing potentially high-risk inactive accounts,” Matt Towson, spokesman for Discover Financial Services, wrote in an e-mail.
A “high-risk” inactive account could pertain to different factors, such as where a person resides or the mortgage the person holds, he said.
He offered an example of what could happen to credit-worthy applicants: “A consumer in an economically stressed area today who meets our criteria for credit may continue to have access to it, but would probably receive a smaller line today than they otherwise would have.”
Nontraditional factors considered
It may sound unfair to price an account based on where you live, whether you hold a subprime mortgage or what you buy, but these factors may have always played a role in account decisions, albeit a smaller one.
- Your mortgage. Some issuers may have always considered where people live or the type of mortgage they have as a risk factor, notes Moroney. “You might say, ‘Well, he’s got a subprime mortgage, but property values are going up, so what’s the risk?’ But when the housing market tanked like it has, they might weigh that factor a little heavier than they might have in the past.”
- Whether you live in an economically-troubled state. Issuers may start to care where you live. “They might just say, ‘Let’s look at geographies and places like Florida and California where there are higher unemployment rates or things going on in terms of the housing market,” Moroney says.
The bank wants to know if you are likely to lose your job, which could impact your ability to repay your debt.
- Desperate spending patterns. Moroney says that people who charge necessities such as groceries, utility bills or an insurance premium to their credit cards may signal to issuers that they’re starting to have financial trouble.
Not to worry if you’re a rewards cardholder who spends in these categories on a regular basis. It’s a sudden change in spending patterns that red flags your account.
- Behavior changes. Moroney says that atypical behavior in spending or payment behavior, such as taking out cash advances, sending smaller payments, revolving balances instead of paying them off as usual or running up sky-high balances, could signal to issuers that a consumer is having financial trouble.
What you can do
Don’t change your spending behavior for the worse, if you can help it. Now is not a great time to start revolving balances or take out a cash advance. Changes like these indicate cash-flow problems and may scare your issuer enough to change the terms of your account.
Continue to pay on time and keep balances low, whether or not you revolve. Pull out those “emergency-only” cards and use them once every six months to keep them active. Buy something inexpensive that you can pay off in a month.
Check your statement each month to confirm the credit limit. Look for change-in-terms notices and call your credit card company if you notice a negative adjustment.
“If you have anything that you can show them that would indicate you’re a better credit risk than they might realize, then you may be able to maintain your credit limit or at least not have it shrunk terribly,” says Gerri Detweiler, a credit advisor for Credit.com.