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Why Are Credit Card Companies Lowering Your Credit Limits?

12/02/2008

Credit card companies have been on a real limit-lowering streak lately. A few weeks ago we ran an article titled “Your Credit Card Company Could Unexpectedly Lower Your Limit.” At the time, I had no idea that this article would touch such a nerve, or that the practice of decreasing credit limits was becoming so widespread.

So, what’s going on? Basically credit card companies are universally re-evaluating their customers and changing limits, interest rates, and fees at will. Honestly, this is a pretty common practice and has been for years. However, due to the current economic crunch the credit card companies are reviewing consumer accounts on a much large scale, and making more changes than normal. Even for people who pay their bills on time, have high credit scores, and don’t max their cards. In other words – their best customers.

We had several readers who left comments to that effect.

This is from a comment left by cfargo:

I was upset with American Express because they had lowered my limit by 75% over the past 3 months and had flat out lied to me trying to justify their actions. As a small business I have used American Express as my working capital over the past 10 years, so their reduction in my working capital was a real slap in the face and really hurt.

At first I took it real personal and thought they were picking on me but have since learned that they are doing this to most of their customers. In September alone they lowered the credit limits of 20% of their card holders and day by day they are doing it to more and more. If you have some extra time and want to be stunned, Google “American Express credit limit” and you too can read horror story after horror story.

Just last night my sister went to use her AMX card at CostCo and it was denied. She got home and called American Express (1/2 hour on hold) to find out that her cards limit was dropped to $600 (just above her balance) from $16,200. This girl has impeccable credit and they did this to her.

And another similar situation from Marsha Carrol:

I have NEVER missed a payment to any creditor, and I am having the same problem with my high credit lines. First they are lowered for bogus reasons (AmEx said it was because Wells Fargo Mortgage holders were a higher risk…I DON’T EVEN HAVE A MORTGAGE WITH WELLS FARGO!!!!) They lowered my credit line from 30,000 to 20,000, initially, and now lower it every few months by a few thousand dollars, which dropped my credit score significantly.

The other companies were not far behind, causing a domino effect…When Bank of America sent me notice that they were lowering my credit line from 20,000 to 6,000 and I called to ask why–they said it was because of my “payment history”. In 15 years of doing business with them I have NEVER missed a payment, but I was told my account was “FLAGGED” because I made a MINIMUM PAYMENT.

One of our readers, Matt, even did a post on his blog, Steadfast Finances, about the limit on his Discover Credit Card being reduced from $7500 to $5000 – and he has a 750 credit score.

So, the biggest question of the day is, why is this happening? Is there a way to prevent it?

Basically, it’s happening because credit card companies are re-assessing their risk tolerance. They are tightening their purse strings a lot. The days of no-fee 0% balance transfers, and regular credit limit increases could be over – at least for now. They’ve been replaced by unexplained credit reductions and higher fees.

But how do the credit card companies decide who’s credit limit gets the axe and who’s doesn’t?

An article from the News Tribune.com shed some eerie light on the subject for me:

Lenders are now increasingly considering factors beyond late or missed payments. Some are looking at geography and shopping behavior as well. If you live in an area with a high foreclosure rate or shop at stores that risky borrowers frequent, don’t be surprised if your line is reduced or your rate goes up.

“Among other factors, we do look at mortgage information and geography where there has been a greater deterioration in home prices. Those are some other factors, but again, we’re looking at the entire credit profile,” Lisa Gonzales, manager of public affairs for American Express, said of credit line reductions.

“We have taken actions such as lowering credit limits, adjusting rates, tightening credit standards and closing inactive accounts, particularly in certain geographies and where we can use mortgage data to enhance our decision-making capabilities,” said Jeanette Volpi, vice president of public affairs for Citi.

So, it’s not enough to pay your bills on time, keep your balances low, and follow the rules. Nope. You’ve got to live in an area where house prices are stable (Someone point me to that neighborhood please…) and shop at high end department stores, apparently.

I think in this instance I’m going to agree with our readers and let out a big ‘ol cry of “Shenanigans!” directed at some of the credit card companies.

The problem with the unexpected credit limit decreases is simple – It wrecks your debt-to-credit ratio if you carry a balance. Your available credit limit makes up almost a third of your FICO score.

Most readers that left comments were carrying well under 30% of their available credit from month to month. Now that their limits have dropped, they look like they are using nearly all of their credit. That alone is enough to drop their credit score.

Some readers are even angry enough to go to court over it!

So, just because I think it will be fun to do, and because you guys suggested it – I am going to have a brief interview with legal expert about the possibility of a class action suit. Now, I highly doubt that will go anywhere, but I think it will be very interesting to have an expert’s opinion on it. So I am going to do that, and share the results with you guys next week. Stay tuned, and don’t forget to grab our RSS feed so that you don’t miss the article.

How about you? Has your credit card company lowered your limit unexpectedly? Are all of your limits the same and you don’t know what everyone is making a fuss about? Tell me about it in the comments!

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