Banks’ new credit criteria
The credit crunch has created an era of credit haves and have-nots.
Some consumers complain that banks are ripping away credit cards, raising their rates or slashing their borrowing limits. But others say their limits have been raised and their interest rates dropped.
What’s going on here?
Banks seem to be playing by new rules. Consumers need to learn what they are.
“The trends we are seeing are going to continue and get more intense by the end of the year,” said Gerri Detweiler, credit advisor for Credit.com. “As credit reform gets closer, banks are working very hard to reduce their risk profile, and that’s causing some pretty dramatic changes for consumers.”
What differentiates one cardholder from another?
Although you could easily get credit with a 680 FICO score two years ago, acceptable credit scores are far higher now, said Ken Lin, chief executive of Credit Karma in San Francisco.
Now a score of 660 is likely to get your cards canceled, and you’re considered “on the margin” until your credit score is in the 740 range, he said.
“One of the things that’s important for consumers to realize is that they don’t necessarily have to have done something wrong,” Detweiler said. “A lot of issuers are cutting credit limits on consumers, not even because those consumers are high risk but because the bank needs to improve their reserve requirements and they can do that by having less debt outstanding.”
If your score is 750 or more, you’re likely to get preferential treatment -- even if your credit issuer is dumping other consumers left and right, she added.
One consumer told her that American Express had slashed his credit limit from $15,000 to $1,000, for no apparent reason. Because he had pristine credit, he called to dispute the change. By the time he was off the phone, his credit limit had not only been restored, it had been hiked to $25,000, Detweiler said.
You can get your credit score free at www.creditkarma .com, which also offers free analysis tools to help you figure out ways to improve your score.
Maintaining a solid record of paying your debts has always been important, but never more so than now. Although in the past most issuers would hike rates on consumers who had two or more late payments with that issuer, now you’re likely to see a rate hike or a credit rescission if you’ve missed even one payment -- even if it’s with another lender.
Banks are looking for any sign of financial distress among their borrowers in this era of high unemployment and rising delinquencies, Detweiler said. If there’s any chance that you’ve become a higher risk, they want to act quickly to raise your rates, cut your credit limits or cancel your card now.
When credit reform rules go into effect in February, lenders face significant restrictions on changing rates and terms. Perfect behavior is crucial in the next six to eight months, Detweiler said.
Beware the cash advance.
“If you have never taken out a cash advance before, be very careful about doing it now,” Lin said. “That could be considered a red flag.”
Credit card lenders don’t have access to your income and employment information, except at the time of application, which could have been years ago, Lin said. That makes them wary of those using cash advance loans, which can provide money for living expenses for consumers who have been laid off or whose hours have been cut.
But that’s not the only activity that could cause you to lose your plastic.
Ironically, you can get canceled for scaling back your spending too. Dave, an Angeleno who asked that his last name not be used to protect his privacy, just had this experience. In light of the bad economy, he decided to cut his spending and debt. When he stopped using one of the cards, preferring cash and a debit card, the card was canceled.
“It was completely bizarre,” he said. “I never missed a payment and I was paying five times the minimum.”
Why would spending less cause your cards to be cut off? In addition to charging interest on revolving balances, credit card companies earn profits through “interchange fees” that are paid by retailers any time a consumer makes a credit card purchase. The interchange fees are no-risk profits since they don’t require that the consumer maintain a loan balance. Thus, consumers who charge a lot are considered good customers even if they pay off their debts every month.
Both Lin and Detweiler suggest that you regularly charge gasoline, groceries and other expenses that you can easily pay off at the end of the month in order to keep access to credit. Don’t carry a balance if you can help it, Detweiler said. But charging regularly is going to give you a better chance of keeping your cards.
If you are near your credit limit, you also could be viewed as a high-risk customer. Lenders want to see you borrowing only a fraction of the credit available to you -- certainly less than 20% and the lower the better. But this ratio will be affected if one of your lenders cancels a card or reduces your credit limit, Detweiler said. (You can figure your debt-to-available credit ratio by comparing the average amount of credit you have outstanding against your credit limits.)
“One creditor could reduce your credit line and that increases your debt ratio, then another creditor sees that and does the same thing,” she said. “It becomes a vicious cycle.”