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** FILE ** Signs for American Express, Master Card and Visa credit cards are shown on a New York store’s door on in this July 23, 2007 file photo. Americans are falling behind on their credit card payments at an alarming rate, sending delinquencies and defaults surging by double-digit percentages in the last year and prompting warnings of worse to come. (AP Photo/Mark Lennihan, file)
SAN FRANCISCO–If you haven’t yet had your credit limit slashed on one of your credit cards, it’s highly likely you will — if Meredith Whitney is right, that is.
Whitney, an analyst and managing director at Oppenheimer & Co. who predicted the current financial-services industry meltdown, now says credit-card issuers will eliminate more than $2 trillion in available credit over the next 18 months.
Already, lenders have cut back on available credit due to their heightened aversion to risk and difficulty in funding loans. Before the financial crisis, consumer loans could be sold on a secondary market and the proceeds could help to spur more lending, but that market has largely dried up. See Consumer Watch on card issuers raising interest rates, fees.
Whitney warns that new accounting rules that will force lenders to record outstanding credit-card loans on their balance sheets, combined with the Federal Reserve’s expected changes in credit card regulations — including limiting lenders’ ability to raise rates on consumers’ existing debt — will prompt them to cut access to credit lines even more.
“Restricting lenders’ ability to reprice an unsecured loan will cause them to stop lending or to lend less,” Whitney said in a recent opinion piece in the Financial Times. Whitney was unavailable to comment for this article. See story on Federal Reserve’s upcoming changes to credit-card rules.
To the degree that limited access to credit dampens consumer spending further, that could severely hinder an economic recovery. See story on biggest drop in consumer spending in seven years.
“Specific to the credit-card industry, we believe that well over $2 trillion of lines will be pulled over the next 18 months, the result of risk aversion and funding challenges, but also regulatory and accounting changes,” Whitney and her colleagues wrote in a Nov. 30 research report.
“The severe consequence of this cannot be overstated,” the report said. “While just over 70% of U.S. households have credit cards, over 90% of those households revolve credit at some point during the year, or in other words use credit card lines as a cash management vehicle.
“Pulling credit at a time when job losses are increasing by over 50% year on year in most key states is a dangerous and unprecedented combination, in our view,” the report said.
Still, some economists note that many consumers have access to credit lines — often tens of thousands of dollars’ worth — that they don’t use.
“There are plenty of middle- to higher-income folks out there who may have a $20,000 line on their credit card but they rarely use more than $2,000 of it. If you knock that line down to $4,000 or $5,000, so what?” said Scott Hoyt, senior director of consumer economics at Moody’s Economy.com. “There is another set of consumers who may have a $2,000 credit line and are borrowing $1,500, $1,800 on an ongoing basis. If you whack their credit line, that’s going to impact them pretty severely,” he said.
“Without knowing how the distribution [of the pull-back in credit] is going to fall among consumers and how much of a utilized line is going to be cut, it’s really hard to say what the overall impact is going to be,” Hoyt said.
Cutting $2 trillion still leaves $2 trillion
Bill Hampel, chief economist with the Credit Union National Association, noted that there’s almost $1 trillion in outstanding credit-card debt currently — it’s about $976 billion according to the latest Federal Reserve figures — and the current ratio of borrowing against available credit is about 20%, according to FDIC figures.
“That means there is about $5 trillion outstanding now of available lines of credit,” he said, with about $1 trillion of it borrowed. If Whitney is right and about $2 trillion of available credit is eliminated, that still leaves about $2 trillion available — twice as much as is currently tapped by consumers, Hampel said.
Still, he’s quick to add that “doesn’t mean [further credit cuts] would have no effect.”
For instance, consider consumers who are carrying a balance and for whom a decrease in credit limit would put them much closer to their limit. “Bingo. They’d stop spending on that card,” Hampel said.
Plus, there’s a psychological effect on consumers. “If households thought they had less of a liquidity back-up available on their credit cards than they did before, that would reduce spending.”
Others agreed the overall effect is hard to judge, as it depends heavily on which consumers are affected. Thus far, credit-card issuers appear to be both focusing their efforts on the least creditworthy borrowers as well as making across-the-board changes regardless of borrowers’ credit standing.
Some lenders have pulled lines “from certain perceived high-risk ZIP codes or areas of weakened home values; others have pulled more uniformly,” according to the Oppenheimer report, which focused on the five biggest credit-card issuers.
Peter Morici, an economist and business professor at the University of Maryland, said that his own credit-card interest rate has been raised. “Everybody is getting their rates raised, no matter what their status is. I have sparkling credit, I haven’t borrowed in years, and [I have] a large income … they raised my rate,” he said.
“It doesn’t affect us … but it does affect those people who do carry balances and there are a lot of them out there,” he said. “It’s people often with small incomes who get in a jam — they need to fix their car. This is going to come down really hard on the working poor or the lower middle class. The banks are trying to balance their books on the backs of the poor,” he said.
Plus, the current state of the job market poses a major risk. “A lot of people haven’t been using credit. If they lose their jobs, they’re going to start to,” Morici said.
What you can do
For consumers who find their credit limit cut or interest rate raised, there are not a lot of options:
Depending on the terms of your credit-card agreement and the laws governing the credit-card issuer, which vary depending on the state in which the company is chartered, the credit-card issuer may offer an opt-out provision when raising interest rates. That means you can contact your lender to tell them you will pay off your balance at the current rate but will close your account (that may happen immediately or after the balance is paid off, depending on the lender’s terms). A lower credit limit will often ding your credit score. One way to bring your score up is to pay down your debt. If you can’t do that immediately, another solution is to call your lender and seek a higher limit. They may listen to a borrower with top-tier credit. Another option is to seek credit elsewhere. Try a small regional bank or a credit union. If you have good credit, “credit unions, and I suspect small banks, too, still have room on their balance sheets to take on additional loans,” Hampel said. If you find yourself falling into a financial vortex due to rising credit-card bills, consider contacting a consumer credit counseling agency. Try the National Foundation for Credit Counseling at NFCC.org or the Consumer Credit Counseling Service of San Francisco, which works with consumers nationwide, at CCCSSF.org. You won’t be alone. Calls to NFCC increased 87% in the second week of November and 170% in the third week of November, compared with the same time periods a year ago.
Also, the traditional personal-finance advice exhorting consumers to pay off credit cards before doing anything else may be turned on its head these days.
“The old advice was that you would pay off your credit cards and the credit cards would be there as emergency backup,” said Gerri Detweiler, a credit adviser with Credit.com. “You might want to start stockpiling some savings before you aggressively pay down cards, so you have liquid savings as a back-up in case your issuer does close the credit line. Once you have at least somewhat of a cushion, then you can go ahead aggressively try to pay down your credit card,” she said.
“Financially it’s not going to save you the most money, but it’s the new reality for a lot of consumers who have assumed that credit would always be there for them.”
Copyright © 2008 MarketWatch, Inc. (more…)
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% of U.S. banks reported a tightening of their lending standards on credit card loans during the previous three months, while only 5% 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% of credit card issuers are lowering credit limits to existing cardholders. Only 8% 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 as 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 look 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 the 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 creditworthy 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 mortgages 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 adviser for Credit.com.
