Credit Card Issuers Lowering Credit Limits
Poor economic conditions are contributing to lower credit limits…
In an uncertain economic environment, credit card issuers are reining in credit limits to reduce risk - sometimes by more than 50%, according to the American Bankers Association (ABA), a bank industry trade group. In fact, 62% of credit card issuers have cut back the lines of credit they make available to consumers, according to a recent report by Javelin Strategy & Research, which advises the financial services industry. According to spokeswoman Betty Riess, credit card issuers are “taking a more aggressive look at accounts to control risk.”
In the midst of a financial crisis and rising delinquencies - up 12% in the second quarter from the same period a year ago, banks have less money to lend. That means that consumers across the board are suddenly finding out the hard way that their limit is not what it used to be. “Credit lending standards are tightening across the board, it doesn’t matter how great your credit score is,” Carol Kaplan, spokeswoman from the ABA said. “This is happening everywhere, to everyone. Consumers with better credit histories and high credit scores are less likely to get hit with a sudden restriction on their credit limits, but it can happen to anyone.”
Consumers will now have less buying power and are more at risk of exceeding their limit and getting hit with fees and higher APRs. Over-the-limit fees can be upwards of $50 and default APRs as high as 32%. With a lower credit limit, consumers are also more likely to use a greater percentage of their available credit, lowering their debt-to-limit ratio, a key component of credit scores. If your limit drops to $2,000 from $4,000 and you continue spending $1,000 a month, your debt-to-limit ratio immediately jumps from a favorable 25% to an unfavorable 50%, negatively affecting your credit score. As a result, lenders may increase your APR or deny you a loan, even if you pay your balance off every month and never exceed your limit.
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