Credit card cutbacks hit consumers hard
Posted
Dec 04 2008, 01:48 PM
by
Karen Datko
Rating:
This post comes from Martin H. Bosworth at partner blog ConsumerAffairs.com.
If there's one thing Kristen King knows, it's how to use a credit card smartly. The Richmond, Va.-based communications consultant uses her American Express Open Blue card to finance purchases for her self-owned business, including supplies, travel costs and regular expenses.
"I made every payment early and amounts well over the minimum due -- and by 'well over' I mean several hundred dollars more than the minimum," King said. "I never exceeded my limit."
Thus it came as a shock when she received a notice via e-mail that American Express was cutting her credit line, effective immediately, with no advance warning.
After navigating AmEx's customer service, she was told her credit line was being reduced due to information on her credit report, including delinquencies.
"I downloaded my free annual credit report from all three reporting agencies in a total panic as soon as I got off the phone, thinking someone had stolen my identity, and there is nothing there," King told ConsumerAffairs.com. "Surely AmEx reviewed my credit report before they gave me the card in the first place."
"I opened the card in June of this year and it's just now December, so what has changed since then? I didn't buy a house, default on any loans, declare bankruptcy, or even miss a payment on any card, theirs included," King said.
In all likelihood, King is a victim of the same problem bedeviling many Americans -- the sudden and sharp withdrawal of credit lines just as consumers need them more than ever.
At a time when rising prices, stagnant wages, and a recession mean that the lifeline of credit could be all that keeps a family afloat, banks and lenders are reducing available credit, increasing interest rates, and outright canceling accounts in an effort to cushion themselves against ongoing losses from the failing global economy.
Risk averse
According to one industry analyst, the financial industry may cut as much as $2 trillion in credit card account lines over the next 18 months in order to reduce risk of damage from increasing delinquencies and defaults.
"We expect available consumer liquidity in the form of credit card lines to decline by 45%," Oppenheimer & Co. analyst Meredith Whitney told Reuters.
Whitney reported that the major banks -- Bank of America, Citigroup, JPMorgan Chase, Capital One, and Wells Fargo -- and individual lender brands such as American Express were planning or discussing reduction of credit lines.
Whitney said credit cards are the second source of liquidity available to consumers, behind wages from work. She criticized the banking industry for offering ever fewer choices at a time when consumers would need more credit
"Pulling credit when job losses are increasing by over 50% year-over-year in most key states is a dangerous and unprecedented combination, in our view," Whitney said.
A contraction in available consumer credit has been predicted for several months since the scope of the economic crisis became apparent. Banks and lenders, exposed to enormous potential defaults from the slumping housing market, began cutting back on credit card account lines while simultaneously raising interest rates, even for the best customers who paid on time and exhibited no risky behavior.
Banks and lenders' ability to change the terms of credit card agreements for any reason has shocked many cardholders, who saw their interest rates double or even triple in recent months despite good payment behavior.
Although the credit pullback has had the welcome side effect of reducing the number of credit card solicitations people get in their mailboxes, it still represents a potentially dangerous economic shock that could rival -- or surpass -- the slump born from the housing market.
Several studies have confirmed that Americans are cutting back on buying luxuries with credit cards, using them to buy necessities instead -- and that more cardholders are having trouble keeping up with their payments.
The sting
For King, the loss of her credit line harms her ability to do business as a self-employed consultant. "I'm trying to register for conferences, make travel arrangements, purchase office supplies, and buy big-ticket equipment while it's on sale around the holidays, and now my ability to do that is limited," she said. "I'm a freelancer, so it's not like I get a regular paycheck every week."
King is not the only one to be stung by sudden credit line reductions or cancellations from American Express. Lara of Miami wrote to ConsumerAffairs.com with a similar story.
"They canceled my Platinum card without notice after being an excellent customer and they said it was due to my Experian report. If you check my Experian report it has gotten even better throughout the years," Lara said. "This has caused lots of anxiety and grief because I am a single mother of a 2-year-old, with a business to run and my only credit card has been canceled without any real explanation."
Real estate investor Lee, of Morrisville, Pa., regularly used checks drawn from his American Express credit line to pay for repairs to properties. "On Nov. 8 I received a letter from American Express dated Nov. 4 that they had rejected one of the three checks and reduced my credit line to $1,000," he said. "They ultimately rejected all four checks to the vendors.
"They claimed this was the result of pulling an Experian credit report," he said, "even though the credit report I pulled from the company as a result of this said zero potentially negative items and I had a perfect payment history with AmEx and all other creditors."
Never a late payment
It's not just American Express cardholders who have been hit with credit line cuts in recent months. ConsumerAffairs.com has received complaints that many different banks are suddenly cutting credit lines and raising interest rates, often simultaneously.
Bill, from Fort Wayne, Ind., had been a Bank of America customer for more than 20 years. In November, he was shocked to find his credit line had been reduced from $19,500 to $1,000 without explanation.
"I called to find out why. They told me a bad report from Experian," he said. "I called Experian; no such report. My credit score is 750. Never a late payment to anyone in my life. Totally messed up my future plans to use this credit line in my business."
Steve, from Glendale, Ariz., used his Citi credit cards to finance purchasing a new business at a 3.9% annual percentage rate. He received a letter on Nov. 23 stating that Citi was increasing his interest rate to 24.9%.
"The only way I can stay at my current rate is to opt out, which means I must close my card and have the total paid by 9/2009," Steve said. "I have no choice but to do the opt-out or I will be paying approximately $395 monthly in interest instead of $79.95."
Even customers with store credit cards have been hit with cutbacks and interest rate hikes. Miguel from San Juan, Puerto Rico, was told that the credit limit of his Sam's Club Discover card was being cut "from $6,000 to $1,920 based on late payments."
"I have always paid this card and my other accounts on time without any problem," Miguel said.
'Alienating responsible cardholders'
In her report on the credit market, Whitney recommended several solutions for the lending crisis, including a return to local lending and knowing customers' business histories, rather than relying on automated credit-scoring systems.
The U.S. House also passed a Credit Cardholders Bill of Rights that would restrict particularly egregious billing and penalty traps. The bill was put aside during negotiations on the financial industry bailout, and no word has emerged as to when it will be taken up again.
Although restricting interest rate changes and penalties would help consumers pay their credit card bills faster, Whitney argued that any new legislation might cause more harm, as the lack of room to raise interest rates would cause banks to pull back even further.
In better times, consumers would be free to cancel any card that is causing them financial problems and shop around for better offers. But the wave of consolidation brought on by Wall Street's troubles has left even fewer banks standing, and consequently fewer options to get credit.
And canceling any card can potentially harm your credit score.
King said she wasn't sure she could get better service anywhere else "because everyone, credit card companies included, is in such bad shape and no one knows what to do about it.
"But I will tell you this," she said. "Alienating responsible cardholders is not going to help anyone."
