Credit Companies Still Cutting Their Risk Exposure
Lots of credit consumers, with good and bad payment histories alike, have got a hit from major card issuers which keep developing new strategies to avoid further credit losses. The new painful technique involves drastically cutting customers' credit limits without a notice, as required by the law.
We needn't bother our heads trying to see the companies' ground to resort to such an uncool measure. The easy credit offered in the mail and online and advertised on radio and TV has led to a killing amount of consumer debt which hurts not only customers, but issuers themselves, lots of other financial institutions, slackening the pace of the US economy development. What does the new protective measure threaten consumers with?
Under the circumstances of growing rates of defaults and tight credit, banks and credit card companies are struggling to retain their profit or at least avoid great losses. Some cardholders must have already suffered from losing credit rewards when card companies pulled back their programs as a result of a new bill.
The bill required that the merchant fees (transaction or interchange fees) should be curbed and made fairer for businesses, but these fees, as claimed by credit companies, were used to provide for rewards. It appears that the lower fees companies collect the poorer rewards they offer back to customers.
Pulling back rewards schemes is utterly innocuous as compared to the new strategy. Imagine consumers who have got accustomed to financial freedom and convenience given to them by their no limit credit cards.
At some point of time, say, when buying flowers for a present, paying for a dinner at restaurant or renting a car, these customers are told their credit card is denied, and this is regardless of their faultless payment records and long-lasting loyalty. And this does damage good credit they've been building on for years, forcing them to pay higher interest rates and face hard times applying for a new credit line.
However, there isn't a law that would prohibit card companies from canceling or altering credit limits at any time for any reason, so, we will have to swallow it.
As of today, Visa, MasterCard and American Express are trimming limits basically for customers who got stack in debts, live in the area affected by the mortgage crisis or make living with unsteady incomes. However, companies do not forget about good credit customers whose zero balances do not generate profit. And even if there is some profit, it works to the advantage of the customer.
Trimming credit limits, companies expect to put their balance sheets in order and to protect themselves from potential losses on new credit lines. What card companies are doing is cutting their risk exposure and we are very unlikely to see any softening until the credit industry and economy recover.
Such companies however as Chase, Citigroup and Bank of America are reported to be slightly increasing their credit lines but that does not apply to bad, high risk account owners.