Lenders abruptly cut lines of credit
Fear excessive use amid hard times
Banks and other lenders nationwide, seeking to reduce their debt exposure, are shutting off and limiting consumer credit card lines, even for many customers who carry low balances and pay on time.
As much as $2 trillion in consumer credit - nearly half of what is available - could be rescinded, according to an estimate by a prominent banking analyst. Just two years ago, institutions were handing out liberal borrowing lines to almost anyone. But now, drowning in debt and soured investments, lenders are seeking to stop consumers from running up big balances in hard times, bills they might not be able to pay.
The credit squeeze doesn't just limit spending potential; it can also damage cardholders' credit ratings by making them appear to be riskier borrowers. And in many cases, the institutions pulling back on credit took government bailout funds that were supposed to encourage them to lend more freely.
Diana Lawton, a 44-year-old freelance writer in Chelmsford, is one of those being affected by the change in credit-line policies. She said American Express Co. called her last week to say her two charge cards - one personal, one for business - had been frozen pending a "financial review." Lawton, who had been using the personal card since 1988, said she was stunned. The company offered no explanation, accord ing to Lawton, but told her she could apply for reinstatement by submitting two years of income tax returns, along with three months of pay stubs and bank records.
Outraged at having to undergo a 10-day investigation of her finances, Lawton canceled the cards. "I know the economy's bad," she said, "but this is just shocking to me."
American Express, which has received $3.4 billion in federal bailout money, declined to discuss Lawton's situation. Lisa A. Gonzalez, a company spokeswoman, said that on "isolated occasions" it asks card members to provide financial information. "Though we continually look at the credit limits we offer card members and review them on a case-by-case basis, we are being more targeted in response to economic conditions," Gonzalez said. "This may also include cancellations."
Most bankers won't offer details about the cutbacks, but acknowledge they are happening. Betty Reiss, a spokeswoman for Bank of America Corp., the nation's second-largest card issuer, said, "We're taking a more aggressive look at accounts in order to control risk in the current environment." The bank is one of the biggest recipients of federal bailout funds - $45 billion.
As far back as July, 60 percent of card issuers reported they were constricting lines of credit, according to Javelin Strategy & Research, a Pleasanton, Calif., firm that tracks the credit card industry. And a Federal Reserve Bank survey in October, the latest available, found the same portion of bankers reporting tighter lending standards on credit cards.
Meredith Whitney, the Oppenheimer & Co. banking analyst who in November predicted a $2 trillion drop in credit availability, has said the loss will hurt the economy because consumers rely on credit cards for regular spending.
In part, banks and credit card companies are reacting to an increase in the number of cardholders who fail to pay their bills. For example, American Express said it wrote off 6.7 percent of its $63 billion US loan portfolio in the fourth quarter, up from 3.4 percent a year ago. To counter such losses, some institutions, including Citibank, have raised the interest rates they charge certain customers as a way to generate revenue.
Citibank said it is primarily raising interest rates for customers who haven't seen a change in two or three years. In a statement, the company said, "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."
In addition, as investor demand for credit card debt that is usually packaged into securities has plunged, banks are being forced to keep the debt on their books longer.
Many of the credit lines being taken away or reduced have not been used recently, according to people who track the business. Dennis Moroney of TowerGroup, a Needham research firm, called it the "kitchen drawer" syndrome because some consumers keep cards they don't need or don't use often. Card issuers are trying to rein in such accounts before they get tapped for emergencies in the slumping economy, Moroney said.
In addition to limiting spending, a reduced credit line can have a lasting effect on personal credit scores. For instance, someone who carries $1,000 balance on a card with $10,000 limit is suddenly tapping into a higher percentage of their credit if the limit is dropped to $3,000 - even though they haven't spent additional money. Using more than 30 percent of total available credit can make a consumer look riskier on paper, according to credit bureaus.
"In general, if a credit limit is reduced, and therefore the amount of credit utilized increases, it could have a negative impact on your credit score," said Tim Klein, a spokesman for Equifax, one of the three major companies that track consumers' credit lines and payment records.
None of the banks contacted for this story would discuss how their actions might affect credit scores.
The company that calculates scores, Fair Isaac Corp., said it is examining the impact that creditline cuts are having. The results are expected to made public within the next month and could lead to a shift in the way scores are calculated. Still, Fair Isaac spokesman Craig Watts defended banks' moves to reduce credit lines. "It's only unfair if you regard credit as a right instead of a privilege," Watts said.
Tom McNiff, a retiree in Winthrop, said he received a letter Jan. 7 informing him the credit line on his Eastern Bank card was being reduced from $12,000 to $2,700 "to reflect your spending." The letter was sent on behalf of Barclay Card US, the company that owns his account.
Kevin Sullivan, a Barclay spokesman, said, "We think we have a [credit] policy that's appropriate for this economic environment."
McNiff said he rarely carries a card balance, unless he makes a large purchase, and even then he typically pays the balance within two months. He said the letter troubled him because he had a hunch it would hurt his credit rating. After McNiff called to complain and the Globe made inquiries about his situation, the company reinstated his $12,000 credit line.
Leslie McFadden, a writer for Bankrate.com, a consumer banking and finance website, said banks are targeting people with inactive accounts as well as those with large balances. "You can't prevent your credit card issuer from lowering your limit," she said. "The advice is to pay on time and keep your balances low."
And if you have a card you haven't used in a while that you want to keep, McFadden said, "Buy something inexpensive and pay it off that month."
Beth Healy can be reached at firstname.lastname@example.org.