In a bid to stem growing losses, banks and card issuers are stepping up efforts to cut credit lines and close down accounts considered as risks. A FICO sponsored study discovered that 58 million cards saw their limits drastically cut during a 12-month period ending in April this year. Analysts say that the cuts were the result of banks trying to minimize growing losses because of the economic recession.
The Obama administration's CARD act of 2009 also had a hand with the drastic measures implemented by card issuers. Industry sources explain that with the new law expected to limit many freedoms banks and other financial institutions used to enjoy, card companies are looking for new ways to maximize revenues. Unfortunately, one way to cut losses would be to reduce credit limits on some cards.
According to the study, the measures undertaken by card companies are resulting in several consequences, some of which may benefit certain cardholders. Concerns about the cuts affecting credit scores have surfaced, with many cardholders worried that their reduced credit limits may influence how creditors view them. Despite this, some industry experts say that the recent developments will only affect very few consumers since most of the accounts involved are mostly lightly used or unused.
However, some consumer advocates expressed dismay over the cuts, pointing out that 24 million of the accounts with reduced credit lines did not have any negative data on their records. FICO spokesman Craig Watts says that card issuers may have relied on other factors to determine whose credit lines to cut.
Specialists also add that the reduction of credit limits can adversely affect credit scores and ratings. As a direct result of the cuts, credit scores can worsen substantially especially since the ratio of outstanding debt to credit limits will automatically increase. For instance, a card with a $25,000 limit and a $5,000 balance would mean a 20% ratio. If the credit line is cut to just $10,000, the ratio then becomes 50%.
Analysts predict that the U.S. can expect more credit limit cuts in the next months as unemployment rates continue to rise. With more jobless Americans, card companies and banks can face increasing charge-offs and rising delinquency rates. Experts have used the jobless rate as an indicator of trends in the credit industry since unemployment figures are closely linked to charge-offs. The upcoming implementation of the newest credit legislation is also poised to boost more credit limit cuts.