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.