By Susan Tompor
Detroit Free Press
As pandemic emergency relief draws to a close for some renters and others, many struggling consumers could be tempted to cover a few bills by pulling out some old, little-used credit cards.
But they could be surprised to discover that the line of credit they thought they had has vanished. Banks have been reducing credit card limits and closing accounts altogether for millions of consumers.
On top of that, the shift could mean that your credit score may drop if you suddenly have less available credit than in the past.
“It’s all about managing risk for banks. Things are so volatile and things are changing so quickly that banks don’t necessarily know who is risky and who is not,” said Matt Schulz, chief credit analyst for LendingTree.
“Some banks will go at this with a scalpel and some will go at it with a flamethrower.”
Nearly 1 in 3 cardholders said they had their credit limit reduced on at least one card in the past 60 days, based on a new survey released Wednesday from CompareCards by LendingTree.
Most credit limits were cut by $1,000 or less. But many who have higher credit limits saw bigger cuts. More than 1 in 5 limits were reduced by at least $5,000.
“When economic times are good, banks are happy to give out more credit,” Schulz said. “But when the economy goes south, all of that available unused credit looks like a bunch of risk to banks.”
The economy is on edge, as jobless numbers hit historic levels in nearly every state in April. While rates have fallen somewhat since, the U.S. unemployment continued to be in double digits in June. The National Bureau of Economic Research declared that the U.S. economy fell into a recession in February.
Banks are doing what they can to protect themselves from the possibility of more bad debt and dark economic clouds. The survey also found that 1 in 4 cardholders said they had at least one credit card closed by their card issuer in the past 60 days.
During the 60-day period from mid-May to mid-July, CompareCards estimated that about 70 million cardholders were affected by a reduced credit limit or a closed card.
Many times, Schulz said, some of these closed cards may be little used by consumers. So he recommends that if someone wants to hold onto a card now, it may be best to use it more frequently. Perhaps, he said, put a recurring monthly payment on the card, such as Netflix, and then make sure to sign up to have autopayment for that credit card so you won’t miss a payment.
Millennials may see shrinking credit more often because they typically don’t have as long of a credit history as someone in their 40s, 50s and 60s.
People with higher incomes can see such cuts because that’s an easy target as many may be more likely to have higher credit limits. Unused available credit poses a risk to issuers, according to Schulz, so banks are making moves to trim it back.
Credit card issuers closed cards in the past, long before the pandemic hit. But earlier surveys showed less frequency. Back in early November 2019, for example, 1 in 7 credit cardholders reported an involuntary closure of one of their cards within the past year, according to a similar survey by CompareCards.
The older you are, the less likely your card was closed against your will.
The groups most likely to be hit: men, high-income Americans, parents with young kids and minorities.
Sometimes the change is made without any reason given. Other times, borrowers are told that credit lines were cut or eliminated because the consumer’s credit score had fallen, the credit card wasn’t being used or the customer had missed a payment.
Many credit card issuers had been working with consumers to let them skip minimum payments for two months early in the pandemic, said Kristen Holt, president and CEO of Farmington Hills, Mich.-based GreenPath Financial Wellness.
Some of those agreements are coming to an end. And consumers must start paying those bills.
In other cases, some consumers might have skipped or missed payments, without working out a deal in advance with their credit card issuers and a missed payment would hurt your credit score.
But consumers had to ask for that relief, as it was not automatically granted.
Jeremy Lark, senior manager of client services for GreenPath Financial Wellness, said he has heard from consumers who saw major credit card issuers reduce their lines of credit and many times people didn’t even realize that they suddenly had a smaller line of credit.
The financial hole can get even deeper if the sudden change in lending terms drives down your credit score.
Credit scores can fall if you’re using all or most of your available lines of credit. In general, you’d want to keep the balance on your credit cards under 25% to 30% of the available credit limits.
If the bank has closed your card or lowered your credit limit, your credit utilization ratio could be far higher than you’d imagine and such a move might drive down your credit score.
What are some strategies? Call your card issuer to see whether a limit might be raised, even though that could be a tough ask. Call other card issuers to see whether they might raise their limits for you, even if those cards didn’t lower the limit.
Keep balances low on your credit card accounts, so it may be wise to aim to pay down even some outstanding debt to help boost your score and keep a lid on high cost interest charges.
It’s also important to review your credit report to see whether any limits have been lowered or credit cards have been closed.
You’d go to AnnualCreditReport.com. Typically, you can request one free credit report from each of the three major bureaus — Equifax, TransUnion and Experian — each year. But now you have access more frequently, if you need it.
Free credit reports are now available every week through April 2021.
Many consumers might not realize that credit limits aren’t set in stone. Credit card issuers have a lot of wiggle room.