The End Of Credit?
Yesterday I got a call from American Express. I was curtly informed that my True Earnings American Express Cash Rebate Credit Card limit was reduced 90%. It isn’t a really big deal because I don’t need that sort of limit. I’ve never used more than 40% of the limit anyway. But I was still pissed. It’s very useful when traveling and I enjoy the cash rebate I get with the card. I’ve been putting my tuition on it and then paying the balance off, which allows me to get some free cash. Some of the benefits include:
I guess Amex decided they weren’t making any money on my account so they basically told me my credit limit was now $2,500. Since my revolving balance is close to that amount every month, my ratio of available credit to debt ratio will look like its over 80% which will hurt my credit score.
Apparently this isn’t an isolated incident. Smart money just had an article about credit card companies reducing credit limits on numerous borrowers, sometimes with the current balance exceeding the new limit.
While the fees, frozen accounts and default interest rates resulting from credit-line cuts can sting your finances, they can do some serious long-term damage to your credit score. Your credit utilization ratio — the total amount of debt you owe in relation to the amount of credit available to you — accounts for roughly 30% of your score. A credit line cut has the potential to decrease your score by 50 points or more if you don’t have much other available credit, says Craig Watts, spokesman for FICO, the company that calculates and issues the credit score that most lenders use.
One of my friends just graduated from USC’s Marshall School of Business. Last year he told me that a visiting professor announced in class that consumer lending was going to dry up and people would no longer be able to get credit. His advice was to get it while they still could!
Seems like that day has now arrived. Regardless of your credit, skittish credit card companies are reducing credit limits. How do they expect to make any money if they’re not lending money?
But more importantly, what good is your credit if you can’t borrow any money? Do you think this might drive people to max out their credit cards while they still have available balances and then default on them?
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March 14th, 2009 at 9:04 am
Same thing happened to me with my oldest credit card in December 2008. Lenders likely want to reduce their risk tolerance by pulling in some overextended credit. From their point of view, they’re likely worried about the scenario in your second question of distressed borrowers racking up more debt than they can repay.
March 14th, 2009 at 9:41 am
I don’t know, maybe it’s just AMEX? I’m a Canadian student living in the U.S. and I just recently quite easily got a Citibank Visa with a $3,000 limit (IMO, that’s a lot to give someone with no US credit history or income verification beyond my scholarship). I filled out a minimalist form and got the card just over a month later.
That said, I’ve been trying to reduce some of my limits myself – scaling back the credit lines and lowering all my balances more than usual, just in case conditions get worse.
I agree though that they’re very important for travelling.
March 15th, 2009 at 11:38 am
That’s what I call a gangster move. They didn’t like the fact that you were making money off of them instead of them making money off of you, haha. That does make sense though.
March 15th, 2009 at 7:12 pm
I have an Amex card and a few years ago I had a credit limit of around $2000. I used a promotion (2.9% APR) to pay for tuition, and they slowly lowered the limit – every couple a months I’d get a letter telling me that my limit was a couple $100 lower (just above my balance). It sits today (paid off) at $700.
I have two discover cards (pay them off each month) and the credit limits on those just keep going up and up. The 2nd account was opened last year (to take advantage of a promotion) and I started with a $5k limit, then they upped it to $7k, and now it’s at $10k.
That might be a better alternative than Amex for you. You can usually find a promotion where they’ll give you $100 if you spend $500 in the first couple of months.
I also have a couple cards through Bank of America and Chase, and they’ve never reduced my limits, either. Amex has been the only one.
For the previous poster, before you try to get your credit limit reduced, take into account that it could negatively impact your credit score. For example, Having $2k in credit card balances with a limit of $10k will give you a lot better score than having $2k with a $3k limit. Of course, if you’re doing it so that you are not able to get that far in debt, than that’s a different story.
March 16th, 2009 at 10:42 am
Same thing happened to me … My AMEX credit limit was $10,100 for the longest time until my limit was slashed to $5,000 during January and showed up on my February statement. I don’t mind the limit decrease since I didn’t use it all anyways… I opened the AMEX card for the 6 month introductory limit of 3% to lower my cost of borrowing in 2008, but didn’t manage to pay it off in the 6 months as I had anticipated. I’m much smarter now with my credit and borrowing than I was in 2007.
My biggest issue was the effect on my ratio:
I went from 47.52% ($4800/10100) to 88% ($4400/5000) within a month. I’m now at 80% ($4000/5000) and hoping to get to 60% by the end of the month ($3000/5000).
March 17th, 2009 at 7:55 pm
Hey, just linked to your great site again in a new post.
July 29th, 2009 at 7:30 am
The banks are boiling the frog and this short-sighted ‘business practice’ will blow up in their face just like every other boneheaded decision the credit industry has made in the past ten years. This has nothing to do with risk management, it is a knee-jerk reaction to Congressional oversight of their Ponzi scheme that takes effect in Feb ‘10.