Credit Card Limits Slashed

Card Holders Not Told. Is It Legal?

According to a recent Synergistics Research Corp survey, 21 percent of consumers reported receiving an interest rate hike, 17 percent reported an increase in minimum payment due and 9 percent had a decrease in credit limit. We had anticipated a large number of card holders suffering rate increases but did not see the slashing of credit lines coming.

The actual results could be much higher than the survey indicates because the survey respondents were people who actually were aware there was a change. Many people mistake notices from their credit card companies as junk mail when in fact it was notification of a change in terms. As a result, most people find out about the adverse action after it has already occurred.

Issuers as a whole are reducing the risk in their credit card portfolios. They face the economic pressures of rising unemployment, charge-offs, increased lending costs and profit-cutting regulations that take effect in July 2010. Already, the average debt deemed un-collectable has doubled to 7.1% up from 4.6% in January of 2008.

A survey of senior bank loan officers made by the Federal Reserve reports that 35 % of the banks have aggressively reduced their exposure by cutting credit limits for their card holders. There was no indication that they notified their card holders in advance as currently, there is no legal requirement to do so. The consumer is charged with discovering this themselves, hopefully on the statement and not when their card is declined when making a purchase at a store.

Regulation Z, which implements the federal Truth in Lending Act, doesn't require national banks, such as Bank of America and Capital One, to give advance notice of a change in the credit limit. They don't even have to notify you if the limit is lowered to or below the balance as the consumer pays it down, a practice called "chasing down the balance."

In one instance, a consumer complained that she had made a payment to her card only to receive notice that she was over her limit. When she examined her online report, she found that her credit limit had been reduced to $300 less than her balance. She immediately paid an additional $300 so the "over limit" item would not be reported to the credit reporting agencies.

Some protection is on the way from the federal government.. Under the Federal Reserve Board's new rules that go into effect July 2010, the issuer is going to be required to give the consumer 45 days' notice before lowering their credit limit to the point where they could get hit with a fee or penalty rate. It's safe to assume that the issuers will do as much chasing down the balance as they can before the July deadline. Even with the new protection, the issuer only has to tell the consumer if the reduction in credit line will result in an additional fee

For now, no federal law restricts the practice. National banks can ignore state laws containing language to the contrary. With the credit card market dominated by a handful of national banks, the burden is on the consumer to check statements or set alerts for balances nearing the credit limit.

Aside from the fees associated with being over limit, the action can also impact your credit score both as an adverse action and by increasing your debt to available credit ratio. That ratio accounts for 30% of your FICO score. A steep drop in score can then cause a domino effect, with other issuers making adverse changes to your accounts.

To offset the lost limit, either rein in spending and pay down the balance or consider getting a new card if your score hasn't fallen too far. If however your score has already taken a hit, your attempt to get a new card will probably fail and you will have another "hard" inquiry on your repot.

However, if you have a severe financial hardship like being unemployed or mounting unpaid medical bills, you may want to talk to the issuer. While on the one hand they want to reduce their risk but cutting credit limits, they also don't want you to default. Often, if you call them, you can work out some kind of plan that will allow you to a least be able to make a minimum payment.