American Banks Take the Initiative to Cut Cardholders' Credit Card Limits

• Author: Michael Bordonada
• Posted: 2024-10-01

The economy has entered a new era of pandemic economics. More than twenty-two million Americans and legal residents have lost their jobs, which economists hope will only be a temporary situation until COVID-19 subsides, and everyone can get back to work. However, many of these jobs may not return by the end of the year, and now credit card issuers are beginning to slash consumers' credit card limits to mitigate their financial risk.

The chief economist at the Lending Tree, Matt Schulz, said, "We knew the purge was going to come at some point, but it looks like it may have started."

You may think that the major credit card issuers like Chase, American Express, Discover, Citi, Wells Fargo, Bank of America, Capital One, and USAA must notify customers of changes to the terms and conditions that will take place on the credit card accounts with at least an electronic or mailed notice of verification.

However, this is not the case. Credit card issuers are free to change your credit card limits any time they please unbeknown to the average cardholder.

As market conditions continue to deteriorate, credit card issuers are also closing accounts in addition to slashing credit card limits. For the average American cardholder, these actions will:
 

• Negatively impact the FICO credit score.


• Negatively impact the cardholder's ability to borrow money for future purchases.

Despite the current financial climate, prominent banks have less money to lend, but the banks are ramping up borrowing for small businesses with staff levels of less than 500 employees. In addition, cardholders may be at a higher risk of becoming delinquent on their credit card accounts with reduced income.
 

Risky Business

To hedge against risk, credit card companies are proactively reducing credit card limits just like they did in the previous great recession of 2008.

Jeff Sigmund of the American Bankers Association said, "Banks are taking a balanced approach informed by economic data, which is consistent with legal and underwriting obligations to ensure credit lines match consumers' ability to repay." Credit card companies just want to re-establish their stronghold in a competitive marketplace.
 

The Debt-to-limit Ratio

Nevertheless, with a decreased credit card limit, consumers are more than likely to utilize a greater percentage value of their total credit card limits, thereby increasing their overall debt-to-limit ratio. This may hamper the consumer's ability to borrow substantial sums as the need arises.

The debt-to-limit ratio is a major component of the FICO credit score. It is determined by dividing the amount a cardholder spends in a month by the average credit card limit.

For example, say, for instance, you had a $20,000 limit on your credit card. The lender decides to reduce your credit card limit from $20,000 to $10,000. You continue to spend $4,000 a month for your normal purchases. Immediately, your debt-to-limit ratio would decrease from a positive 20% to a negative outflow of 40%. To have the best possible credit score, you want to keep your debt-to-limit ratio under 30%.

Consequently, banks may deny you a future loan or increase your finance rate on approved loans. You may even pay your balance in full every month, but the reduced credit card limit will continue to hamper your financial prospects.
 

Cardholder Options

However, cardholders are not left out in the cold. You have available options if you happen to find yourself in this situation where the lender has decreased your credit card limit.
 

• Contact your credit card issuer and explain your financial situation. Let your lender know you have earned or unearned income, and you would like your credit limit to remain at its pre-recession level.


• If you happen to become delinquent on your minimum credit card payments because you lost your job, ask your creditor to report your account as current to the credit bureaus. Keep in mind, you must apply for this assistance at your bank.


• Open another credit card so that you will have the same access to credit as you had before the COVID-19 crisis.


• Ask for temporary pandemic hardship assistance. Prominent banks are waiving late fees and ATM fees, deferring monthly credit card payments for up to 120 days and allowing consumers to access certificates of deposits early.

With these guidelines, get your personal finances back on track. Hopefully, by the end of the year, most of the COVID-19 job losses will recover.