The Credit Card Crunch  

Yesterday my husband received a letter from his credit card company, saying that they, "serving their customers' best interests," would reduce his credit limit by half, effective immediately. As you can imagine, this caused a considerable uproar in our household. We'd never been late on payments, in fact, we usually pay off our balance every month. We never maxed out the card. We've been good little customers. So why in the world would the company halve his credit limit?

My husband decided to have a personal word with the company, and after being transfered back and forth a couple of times, one rep told him that "you're not utilizing the full amount of credit we've given you." In other words, "You don't really need that much, so we just reduced what you can get." My better half lost no time pointing out that the higher your debt utilization ratio, i.e., the amount of credit you use, the greater the risk of hurting your FICO score. And the company was saying you have to max out your credit in order to retain your full limit? It didn't really help that the rep pointed out that the company was in the process of doing the same thing to at least another 90,000 of its customers.

Something smelled fishy to me. So I decided to give my trusted Google a try and found an article on smartmoney.com, titled "Credit Card Companies Put Tighter Squeeze on Cardholders."

The article stated that "Faced with a growing wave of delinquencies, [credit card companies are] tightening lending standards considerably, focusing on card members they perceive at highest risk of default. [...] Unfortunately, these days lenders are expanding the definition of high risk to include many consumers who would have been considered good customers just months ago. Now, cardholders can be subject to greater scrutiny based on where they live or what type of business they run.

"[...] American Express CEO Kenneth Chenault said the company is 'implementing targeted line reductions for specific segments of our portfolio representing the greatest risk,' including card members 'holding subprime mortgages and small businesses operating in specific industries, such as mortgage companies, home builders and construction-related businesses.' Furthermore, he noted that the company is 'adjusting credit models to reflect the higher probability of default that exists during a weaker economy, and in geographies that have been most impacted by home price declines.'"

So that was it. My husband is a home improvement contractor -- and they were cutting him down as a potential delinquency risk, no matter how good his credit history with the company was. Other customers have reportedly seen their credit limit shrink after paying down lump sums on their credit card debt. In credit card company lingo, this practice is called "Chasing the Balance." Some people who missed the companies' notice of change because they were on vacation or a business trip, unwittingly exceeded their newly slashed limits, resulting in steep penalties, higher interest rates and a lowered FICO score.

Spooked by the subprime meltdown and an economic crisis in the making, credit card companies have started to get cautious. And who could blame them: as the U.S. economy slides downhill, jobless claims rise and skyrocketing food and gasoline prices hit the average American hard into the wallet, credit card delinquencies, naturally, have gone up as well. According to a recent study by RiskMetrics Group, the number of credit card accounts at least 60 days delinquent or that had gone into default increased to 7.6% in December 2007, up from 6.4% in December 2006. Total revolving debt in the U.S. had reached $944 billion in December 2007... a seasonally adjusted annual increase of 2.7%. And American Express just announced that uncollectible debt in the company's credit card unit rose to 5.5% of loans, from 4.3% in Q407.

So, of course it's understandable that credit card companies are getting squeamish about whom to lend money to. And the ramifications can hit anyone who happens to work in one of the "at risk" industries or has the misfortune to live in an area where foreclosures have been up. I'm just wondering what will happen when -- not if -- this practice of cutting down customers' credit limits becomes widespread. Americans in lower income categories, already struggling to pay their bills and often falling back on their credit cards as a last resort, will lose their last way to make ends meet. Look for bankruptcies popping up around the country like mushrooms after a summer rain. And possibly a lot more new residents in America's tent cities.