Cardholders seeing credit limits lowered

Cecil Bello has stumbled into a new corner of the credit squeeze. The 32-year-old management consultant has had the limits reduced on three of her credit cards.

In September, U.S. Bancorp notified the Fairfax, Va., resident that she no longer had a $14,500 limit on a card that had a balance of about $5,000. Her new limit left her just $500 from being maxed out, she said.

Then came an Oct. 26 letter from American Express Co. that said she now had a limit of $14,000, down from $22,000. That letter said her “total debt is too high relative to your payment history with us and other creditors.”

This month she received an e-mail from American Express notifying her that the cap on another card with a $5,000 limit had been reduced to $3,000 and that her new cash advance limit was down to $200.

Bello said she had made more than the minimum payments on time each month.

“I am taking responsibility for paying off my debt,” she said. “But when credit card companies trap people this way, it’s almost impossible to dig yourself out of the hole.”

Like many other card users, Bello has learned the hard way that credit card companies are increasingly putting the clamps on their customers. Lenders are taking a wide range of steps to mitigate their risk as unemployment rates tick up and the number of delinquent borrowers grows. Besides cutting credit limits, card companies are raising rates and fees and suspending offers such as no-interest balance transfers. They are also making rewards programs less rewarding and shutting down inactive accounts, industry analysts and watchdogs said.

The signs of the squeeze on consumers are accumulating. Last spring, Capital One Financial Corp. notified customers who had made no transactions in three years or more that their accounts would be closed. On Nov. 1, Discover Financial Services removed its cap on balance-transfer fees. Average late fees on all cards have gone up about 10% in the last year, according to a review by CardRatings.com.

“What’s happening is that everyone is looking at the jobless rate, and there’s every indication that joblessness is going to increase well into next year,” said David Robertson, publisher of the Nilson Report, a newsletter that monitors the industry. To credit card issuers, that means a sharp rise in loans that have to be written off as uncollectable, which are known as charge-offs, he said.

Lenders are now increasingly considering factors beyond late or missed payments. Some are looking at geography and shopping behavior as well.

“Among other factors, we do look at mortgage information and geography where there has been a greater deterioration in home prices,” Lisa Gonzalez, manager of public affairs for American Express, said of credit-line reductions.

“We have taken actions such as lowering credit limits, adjusting rates, tightening credit standards and closing inactive accounts, particularly in certain geographies and where we can use mortgage data to enhance our decision-making capabilities,” said Jeanette Volpi, vice president of public affairs for Citigroup Inc.

Credit line reductions, in particular, have wreaked havoc on many consumers by affecting their debt utilization ratio, which is the percentage of available credit they are using. A high debt utilization can lower a credit score, which then makes it tougher to get credit, or at least get credit under favorable terms.

Joanna Fridinger, owner of a limo company in Baltimore, found herself feeling the wrath of American Express. She had a credit limit of $19,500 on a card she had gotten in 2004 and, she said, faithfully paid on time. But a dispute with Macy’s over a broken vacuum she bought dinged her credit report. She said she refused to make payments on the vacuum and was hit with a late fee.

In March, American Express slashed her limit to $1,400, she said.

“I was paying over and beyond what they even asked me and that was why I was so shocked that they did this,” she said. “I thought, what the hell? I’ve been a good customer. Doesn’t that mean anything?”

American Express is by no means the only lender to take such actions. In the Federal Reserve survey, 20% of domestic banks said they had cut credit limits for existing prime, or very creditworthy, borrowers. About 60% said they had cut limits for existing nonprime borrowers, and none reported raising lines for those clients.

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Trejos writes for the Washington Post.