A month ago I wrote that credit cards might soon become tougher to get as banks tightened lending standards. In a down economy there’s more risk that banks won’t get paid back, so it’s logical they’d become careful about extending credit.
Already we’ve seen what appears to be a tougher approach to new small business cards at Chase, where approvals are harder without having a pre-existing banking relationship with the issuer. Given lockdowns across the country, would you extend credit to a small business right now?
When banks expect an increase in defaults, they take steps to limit their exposure. During the Great Recession we saw banks unilaterally cut credit limits, especially where cards were going unused or underutilized. I recall having the credit line on a United Visa chopped by about 60% (down from a limit of greater than $80,000).
The idea here is that if you’ve got credit, you might start using it, and a sudden increase in credit use may be correlated with an inability to pay for things in the current environment.
Reportedly the practice of cutting credit limits on cards is beginning to happen during this cycle as well.
As financial conditions worsen for millions of Americans, credit card companies are tightening the purse strings.
In fact, some card issuers have already begun lowering credit limits — sometimes without notice — and more are expected to follow.
One consequence of lowering credit lines is that your credit utilization ratio worsens. If you have a balance of $2000 on $20,000 of available credit, you’re using 10% of your available credit. If your credit lines shrink to $4000, you’re now using 50% of your available credit. Nothing has changed about your spending patterns, and you may even be paying off your cards in full every month.
Utilization percentage is a contributor to your credit score, so banks unilaterally chopping available credit can drive down your credit score – which, in turn, can make it harder to get credit from other banks. If you have card balances, a drop in your credit score could lead to paying higher rates.
Since it’s a good idea when you can to maintain the total amount of your available credit, it can be a good idea to seek additional credit (eg apply for new cards) if your current cards reduce your available credit, especially to do so before your score drops as a result.
@Gary. Excellent post. One of credit card issuers biggest fears (over the portfolio), is that a significant portion of their credit card customers will lose their jobs, run up their credit cards trying to survive, then declare bankruptcy. A $0 balance/$10,000 credit card line to a 750 plus credit rating can be a $10,000 loss in the blink of an eye. Around 10% of the USA workforce just claimed unemployment. Not a good sign for credit card issuers.
Will your credit card issuer notify you if they reduce your credit limit? Or do you need to check every account?
I would wonder if, as a part of determining who/what accounts to lower CLs, that they would use the card holders employer (name) or use a general industry as a means of targeted lowering of CLs.
Just thinking, I can see a case that says perhaps those whose credit files (as maintained by the creditor) say they work for a US airline or are perhaps a self-employee hairstylist might be first to be examined for action as opposed to someone whose file say they work for a hospital or other “essential” service like law enforcement or fire services.
thoughts on helocs?
How about those of us who are retired, and therefore no employer, or industry to scrutinize; isn’t a good credit score something which will then be useful?
I’m not sure if now is the time to be applying for new credit cards. Seems likely that applying for new credit cards and then lenders starting to slash limits may be a red flag for other lenders to start making cuts.
There must be enough AI to know if people’s situation has changed. If you are still paying off your card in full every month what possible reason could they have to cut your limit?
I was at 5/24 and had only 3 months to go before getting a new Chase card. But I have decided to forget about Chase. I applied for 2 credit cards before the get bank purge happens. It’s better to get what you can now before it’s too late. I encourage you guys to grab whatever miles/points/cash back you can before the tap gets cut off.
And in this hobby you should not be carrying a balance. My credit utilization averages around 1% sometimes zero percent. So if they cut my credit limit in half I’m still in good standing.
@Patty yes they will
Also noticed that pretty much every 0% balance transfer offer I had across close to a dozen cards at various banks all disappeared about a week ago.
Had a little bit of the opposite experience. Have several Chase cards with about $90K line in aggregate. Use each monthly but little use of one and nowhere near the limit on any of them. Pay in full every month. About 10 years history. Just received an offer for a “loan against my CL” (don’t remember the exact terminology) up to $15 K on one of the cards. No credit check,etc… So seems like there is some willingness to take on “risk” for certain CC customers.
There is more than just the individual situations of cardholders. Banks must answer for the aggregate sum of unused credit lines to their regulators, and in an environment like the one we are in, some issuers would like to appear that they are in front of their portfolio deterioration rather than behind it. This is one reason why good risks get caught up in the net as well — an $80,000 credit line that hasn’t been used in 24 months is an easy target when you can chop half or even three quarters of it off and still have a usable card for your customer while also eliminating a substantial liability risk.
Received my Chase statement and my limit had been decreased by 4k. I was stunned and have yet to get any type of notification from Chase. This is the only card I use and pay twice the minimum payment each month. I’ve had chase accounts for over 20 years.
Even before this economic crash and the virus Chase cut the limit on one of my cards in half. They did not notify me. My credit score is over 800 and my utilization is consistently low, and nothing is ever paid late. I don’t churn cards. This particular card was my first and oldest card with my highest limit, which was more a matter of satisfaction and pride than necessity. Chase lowered my opinion of them dramatically by doing this, although I don’t care much for banks to begin with. Ironically my credit score has gone up a bit since then despite that action.
@Patty, two of mine were cut without prior notification! But It was for me since I rarely use them!
I had a 30.000 and my credit card went up to 60.000. Have no clue what these people are talking about sounds like bs
A year or two ago I stopped spending on airline cards (opting instead to spend only on my CSR and DoubleCash cards). A couple months ago Chase notified me they were slashing a big portion of my UA Explorer credit limit, which I hadn’t used in a while. I called them and they immediately reinstated the full limit with no questions asked.
One of my cards through Synchrony Bank got whacked 50% the day after my payment posted. I saw it and wrote them asking why they cut me so deep, since I pay more than the limit, have no missed payments, good credit, and a job. Told them I found it punitive and petty, and if they did not restore me, I would be closing all my cards with them (I have several). The next day I checked, and it was back to where it was.