Credit Card Companies Lowering Borrowers' Limits

By Larry Abramson (NPR)

Lenders, worried that borrowers may soon be out of work and unable to pay, are cutting the limits on credit cards. But consumers are fuming because the lower limits can hurt their credit ratings.

Texas-based flight attendant Lilli Durbin used to have six credit cards, which is fairly typical for this country. She couldn't pay them off, but she says she always played by the rules: "Always paid more than my minimum balance, always paid it a week or two in advance."

Nevertheless, Durbin was notified late last year that the bank behind two of those cards was going to drop her credit limit — from about $10,000 to $4,000 for each card. That was right around the average balance she'd been holding. She called the bank to fight the decision and she didn't mince words.

"I said, you know, just because you guys screwed up with mortgages, don't go and take it out on people ... that have been good."

The bank didn't budge. Durbin was particularly upset that the change meant her credit score would drop, because her balance was suddenly bumping up against her credit limit. She feared that might complicate her effort to refinance her house.

Banks Gauging Risk Of Lending

This tale of woe is pretty common. Most lenders told the Federal Reserve in the most recent survey they are tightening polices for credit cards and other consumer loans.

Why would lenders pick on conscientious borrowers like Durbin? Well, right now it's not so easy to tell the good risks from the bad.

"This is the problem with unemployment that doesn't seem to be abating," says David Robertson, publisher of the Nilson Report, a trade journal for the credit card industry. He says companies are poring over unemployment and foreclosure reports, trying to predict which borrowers in which parts of the country will run into trouble in the near future.

"They're trying to determine who the customers might be who today look perfectly good — able to pay their bills — but 60 days from now will unfortunately be out of work," Robertson says.

So, upstanding, bill-paying citizens might face a precipitous plunge in their credit card limit because of something that hasn't even happened yet.

Nessa Feddis of the American Bankers Association says there's another force at work: Lenders are still having a hard time raising money from investors, so they have less money available for consumers to borrow.

"Because of the increased risk that the loans won't be repaid, the investors are either demanding to be paid more for the increased risk or they're not lending money at all," she says.

Watching Your Credit Score

Banks are not required to give any advance notice if they lower your credit limit, though many do. When the ax does fall, consumers do have some recourse. They can simply jump ship and find another card — low-rate offers still inundate the nation's mailboxes.

But Leslie McFadden of the Web site Bankrate.com says your credit score may suffer if you switch cards too often.

"How much it affects your credit depends on a number of things, including for how long you've had credit," she says. "So if you only have a very thin [credit] file, the effect could be larger."

You could do what Durbin, the flight attendant, did.

"You might as well refinance your house and get the money, pay off the credit cards and cut them up," she says.

Whether it's because of frustration, or a drop in income, consumers are turning away from credit cards. The Federal Reserve said Tuesday that credit card borrowing dropped by nearly 10 percent in February. Bills to improve protections for credit card users are moving through both houses of Congress.