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Credit Card Cutbacks Hit Consumers Hard

Business owners, responsible users get pinched as industry retrenches

By Martin H. Bosworth
ConsumerAffairs.com

Page 1 | 2

December 4, 2008

• Credit Tips And Tricks • Get Control of What You Owe • No Easy Way Out Of Credit Card Debt • Penalty Fees, Interest Rate Hikes, and Misleading Contracts Await Credit Card Shoppers • "Convenience Checks" Carry a Heavy Price Tag • New Forms of Credit Scoring • Understanding Credit • Credit Bureaus: Who You're Dealing With • Reading Your Credit Report • Credit Scoring: The Fickleness of FICO • Credit Knowledge: A Long, Hard, Struggle --- News • Retailers Applaud GAO Report On Interchange Fees • Schumer Moves to Clean Up Credit Reporting Ads • Report: Deceptive Credit Card Practices Remain Widespread • Dodd Bill Would Freeze Credit Card Rates • Annual Credit Card Fee Makes a Comeback • Credit Card Holders Angrily Abandon Their Cards • Fed Proposes New Credit Card Rules • Lawmakers Propose Faster Adoption Of New Credit Card Rules • Acid Test: Prepaid Debit Card vs. Big Bank • J.D. Power: Customer Satisfaction With Credit Cards Falls • How To Survive The New Credit Card Rules • New Credit Card Law Not A Cure-All • Consumer Credit Continues To Shrink • Consumers Using Credit Cards To Stay Afloat, Survey Finds • Credit Cards Giving Consumers Heartburn • Obama Signs Credit Card Bill • Olive Garden Settles Credit Card Data Exposure Suit • Video — Credit Card Law May Produce Unintended Consequences --- • More about credit cards

If there's one thing Kristen King knows, it's how to use a credit card smartly. The Richmond, Virginia-based communications consultant uses her American Express Open Blue card to finance purchases for her self-owned business, including supplies, travel costs, and regular expenses.

"I made every payment early and amounts WELL over the minimum due — and by 'well over' I mean several hundred dollars more than the minimum," King said. "I never exceeded my limit."

Thus it came as a shock to King when she received a notice via email that American Express was cutting her credit line, effective immediately, with no advance warning.

After navigating American Express' customer service, she was told her credit line was being reduced due to information on her credit report, including delinquencies.

"I downloaded my free annual credit report from all three reporting agencies in a total panic as soon as I got off the phone, thinking someone had stolen my identity, and there is nothing there," King told ConsumerAffairs.com. "Surely AmEx reviewed my credit report before they gave me the card in the first place?"

"I opened the card in June of this year and it's just now December, so what has changed since then? I didn't buy a house, default on any loans, declare bankruptcy, or even miss a payment on ANY card, theirs included," King said.

In all likelihood, King is a victim of the same problem bedeviling many Americans--the sudden and sharp withdrawal of credit lines just as consumers need them more than ever.

At a time when rising prices, stagnant wages, and a recession mean that the lifeline of credit could be all that keeps a family afloat, banks and lenders are reducing available credit, increasing interest rates, and outright canceling accounts in an effort to cushion themselves against ongoing losses from the failing global economy.

Risk averse

According to one industry analyst, the financial industry may cut as much as $2 trillion in credit card account lines over the next 18 months in order to reduce risk of damage from increasing delinquencies and defaults.

"[W]e expect available consumer liquidity in the form of credit-card lines to decline by 45 percent,"Oppenheimer & Co analyst Meredith Whitney told Reuters news service.

Whitney reported that the major banks — Bank of America, Citigroup, JP Morgan Chase, Capital One, and Wells Fargo — and individual lender brands such as American Express were planning or discussing reducing credit lines.

Whitney said that credit cards were the second source of liquidity available to consumers, behind wages from work. She criticized the banking industry for offering ever fewer choices at a time when consumers would need more credit

"Pulling credit when job losses are increasing by over 50 percent year-over-year in most key states is a dangerous and unprecedented combination, in our view," Whitney said.

A contraction in available consumer credit has been predicted for several months since the scope of the economic crisis became apparent. Banks and lenders, exposed to enormous potential defaults from the slumping housing market, began cutting back on credit card account lines while simultaneously raising interest rates, even for the best customers who paid on time and exhibited no risky behavior.

Banks and lenders' ability to change the terms of credit card agreements for any reason has shocked many cardholders, who saw their interest rates double or even triple in recent months despite good payment behavior.

Although the credit pullback has had the welcome side effect of reducing the number of credit card solicitations people get in their mailboxes, it still represents a potentially dangerous economic shock that could rival--or surpass--the slump born from the housing market.

Several studies have confirmed that Americans are cutting back on buying luxuries with credit cards, using them to buy necessities instead--and that more cardholders are having trouble keeping up with their payments.

The sting

For King, the loss of her former credit line directly harms her ability to do business as a self-employed consultant. "I'm trying to register for conferences, make travel arrangements, purchase office supplies, and buy big ticket equipment while it's on sale around the holidays, and now my ability to do that is limited," she said. "I'm a freelancer, so it's not like a get a regular paycheck every week."

King is not the only one to be stung by sudden credit line reductions or cancellations from American Express. Lara of Miami, Florida wrote ConsumerAffairs.Com with a similar story.

"They canceled my Platinum Card without notice after being an excellent customer and they said it was due to my Experian report. If you check my Experian report it has gotten even better through out the years," Lara said. "This has caused lots of anxiety and grief because I am a single mother of a two year old, with a business to run and my ONLY CREDIT CARD has been cancelled with out any real explanation."

Real estate investor Lee, of Morrisville, PA, regularly used checks drawn from his American Express credit line to pay for repairs to properties. "On November 8 I received a letter from American Express dated November 4 that they had rejected one of the three checks and reduced my credit line to $1000," he said. "They ultimately rejected all four checks to the vendors.

"They claimed this was the result of pulling an Experian credit report," he said, "even though the credit report I pulled from the company as result of this said 0 potentially negative items and I had a perfect payment history with AMEX and all other creditors."

Lee claimed he owes $500 in fees from not being able to pay taxes on the properties on time, and feared that his business reputation might be damaged as a result of the losses.

Next: "Never A Late Payment"

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