What’s In Your Wallet - A Lower Credit Limit And Lower Score

The financial crisis in the mortgage market is causing a tightening of available credit in the credit card arena.  As falling real estate prices decrease home equity borrowing, more consumers are turning to credit cards.  Investment firm Merrill Lynch reports an 8 per cent increase in revolving credit over last year, the highest increase in 7 years and more than the average 2 to 3 per cent increase over the past few years.

As a consequence, banks are taking steps to reduce the risk of default from this increased usage, according to an Associated Press, AP, article, Cardholders hit twice as credit limits lowered, appearing on MSNBC.  How are banks reacting?  By lowering the credit limit on tens of thousands of card accounts, limiting balance transfers and by increasing the interest rate on accounts with a higher predictability of default, according to the AP.

The Office of the Comptroller of the Currency, OCC, requires banks to provide consumers 15 days notice before changing the terms of a cardmember agreement.  That leaves little time for consumers who are preciously close to the new limit to adjust their spending habits or acquire funds to pay down the balance.  Ironically, or by design, the lower limit coupled with the increased reliance on credit cards pushes consumers closer to the credit limit.  Cross over that line and banks impose additional overlimit fees and higher default interest rates pushing consumers closer to a credit card collection lawsuit.

Default, as well as a reduction in available credit causes a lowering of the credit score.  Part of the FICO score measures the use of available credit.  A high debt to credit limit ratio results in a lower score.  That lower score makes it more expensive to borrow money or could result in loan denial based on the lower FICO score.

The AP article warns consumers to pay attention to any notices from the bank and to prepare for these changes.