By Nancy Trejos
Washington Post Staff Writer
Sunday, November 16, 2008
Cecil Bello has stumbled into a new corner of the credit squeeze. The 32-year-old management consultant has had the limits reduced on three of her credit cards.
In September, U.S. Bank notified the Fairfax County resident that she no longer had a $14,500 limit on a card that had a balance of about $5,000. Her new limit left her just $500 from being maxed out, she said.
Then came an Oct. 26 letter from American Express that said she now had a limit of $14,000, down from $22,000. That letter said her "total debt is too high relative to your payment history with us and other creditors."
Early this month, she received an e-mail from American Express notifying her that another card with a $5,000 limit had been reduced to $3,000 and that her new cash advance limit was down to $200.
Bello said she had made more than the minimum payments on time each month.
"I am taking responsibility for paying off my debt," she said. "But when credit card companies trap people this way, it's almost impossible to dig yourself out of the hole."
Like many other card users, Bello has learned the hard way that credit card companies are increasingly putting the clamps on their customers. Lenders are taking a wide range of steps to mitigate their risk as unemployment rates tick up and the number of delinquent borrowers grows. Besides cutting credit limits, card companies are raising rates and fees, and suspending offers such as zero percent balance transfers. They are also making rewards programs less rewarding and shutting down inactive accounts, industry analysts and watchdogs said.
The retrenchment, which follows years of lavishing Americans with offers and ever-increasing limits, is squeezing consumers at a time when they have already lost other avenues for borrowing, such as home equity lines of credit.
"We've been hearing about the liquidity crisis affecting banks for quite a while. Now we're seeing it transform into a crisis affecting people's personal finances as well," said Joe Ridout, a spokesman for Consumer Action, an advocacy group. "The next wave of the financial crisis may well be a credit-card-related crisis."
The signs of the squeeze on consumers are accumulating. Last spring, Capital One notified customers who had made no transactions in three years or more that their accounts would be closed. On Nov. 1, Discover removed the cap it used to have on balance-transfer fees. Average late fees on all cards have gone up about 10 percent in the past year, according to a review by CardRatings.com.
"What's happening is that everyone is looking at the jobless rate, and there's every indication that joblessness is going to increase well into next year," said David Robertson, publisher of the Nilson Report, a newsletter that monitors the industry. To credit card companies, that means a sharp increase in loans that have to be written off as uncollectable, which are known as charge-offs, he said.
Already, there are signs that consumers are having trouble keeping up with payments. According to Moody's Investors Service, credit card charge-off rates rose 48 percent in August from the same time last year. It was the 20th consecutive year-over-year increase in charge-offs. The ratings agency said it expects the numbers to increase throughout 2009, surpassing levels reached during past recessions.
Delinquency rates are also up. Capital One, for instance, reported that delinquencies jumped to 4.2 percent in the third quarter from 3.85 percent the previous quarter and from 3.8 percent a year ago.
Even lenders who cater to more credit-worthy borrowers have suffered losses. American Express wrote off 5.9 percent of its loans in the third quarter, up from 5.3 percent in the second quarter and 3 percent a year ago.
"Cardmember spending is likely to remain soft" into 2009, Kenneth I. Chenault, chairman and chief executive, said in a news release. "Loan growth will be restrained, in part because of the steps we are taking to reduce credit risks, and credit indicators are likely to reflect the continued downturn in the economy and throughout the housing sector."
The numbers have spooked lenders into withholding credit. Major issuers, such as Bank of America, have said they have raised their standards for granting cards. Stephanie Jacobson, first vice president of public affairs for Chase Card Services, said the company has increased its credit-score cutoffs for direct-mail marketing. "As leading indicators began to change in early 2007, we adjusted our risk-management policies and procedures to better manage potential losses," she said.
Fewer consumers are now getting courted. According to Mintel Comperemedia, a marketing research firm, 1.34 billion credit card direct mail offers were sent out in the third quarter, down 13 percent from the previous quarter and 28 percent from a year earlier.
A Federal Reserve survey of lenders, released last week and conducted last month, found that 50 percent had raised their minimum required credit scores over the past three months, which prompts the question: What makes a customer desirable these days?
"This is a moving target because the most credit-worthy a year ago was someone with a 700 FICO score. Now it's more like 730," said Curtis Arnold, founder of CardRatings.com.
Lenders are now increasingly considering factors beyond late or missed payments. Some are looking at geography and shopping behavior as well. If you live in an area with a high foreclosure rate or shop at stores that risky borrowers frequent, don't be surprised if your line is reduced or your rate goes up.
"Among other factors, we do look at mortgage information and geography where there has been a greater deterioration in home prices. Those are some other factors, but again, we're looking at the entire credit profile," Lisa Gonzales, manager of public affairs for American Express, said of credit line reductions.
"We have taken actions such as lowering credit limits, adjusting rates, tightening credit standards and closing inactive accounts, particularly in certain geographies and where we can use mortgage data to enhance our decision-making capabilities," said Jeanette Volpi, vice president of public affairs for Citi.
Reducing credit lines, in particular, has wreaked havoc on many consumers by affecting their debt utilization ratio, which is the percentage of available credit they are using. A high debt utilization can lower a credit score, which then makes it tougher to get credit or at least get credit under favorable terms.
Joanna Fridinger, owner of a limo company in Baltimore, found herself feeling the wrath of American Express. She had a credit limit of $19,500 on a card she had gotten in 2004 and, she said, faithfully paid on time. But a dispute with Macy's over a broken vacuum she bought on credit dinged her credit report. She said she refused to make payments on the vacuum and was hit with a late fee.
In March, American Express slashed her limit to $1,400, she said.
"I was paying over and beyond what they even asked me and that was why I was so shocked that they did this," she said. "I thought, 'What the hell? I've been a good customer. Doesn't that mean anything?' "
Gonzalez of American Express said that in a typical year, fewer than 20 percent of its customers have their lines adjusted. Of that proportion, 80 percent usually have credit increases, while 20 percent have decreases. In mid-2007, that shifted to a 50-50 ratio.
American Express is by no means the only lender to take such actions. Bank of America, Citi and Discover are among the major issuers who said they have done so as well. In the Federal Reserve survey, 20 percent of domestic banks reported having reduced credit limits for existing prime, or credit-worthy, borrowers. About 60 percent said they have cut limits for existing nonprime borrowers, and none reported raising lines for those customers.
Many card companies have had weak earnings, which they are responding to by raising interest rates on some borrowers, even as the Federal Reserve has slashed the federal funds rate.
According to CardRatings.com's database of credit card offers, the average interest rate was 13.8 percent on Nov. 4, up slightly from 13.75 percent on Oct. 15. That is a 1.27 percentage point decline from the average rate of 15.07 percent in the third quarter of last year. But given that the Fed has cut rates by a total of 3.25 percentage points (excluding the most recent cut of 0.5 percent late last month, which will probably not move card rates for a while), "clearly consumers haven't benefited from most of the rate cuts in the past year or so," said Arnold of CardRatings.com.
Most major banks base the annual percentage rates on their variable rate cards, which make up the majority of credit cards, on the prime rate, which is pegged to the federal funds rate. But how much and how soon they cut rates after a Federal Reserve action is up to them. And many have rate floors, or minimum rates they will charge, analysts and watchdogs said.
"Many Chase customers have variable rates and for those customers, when a change is made to the prime rate, they may see their rate decrease or increase," said Jacobson of Chase Card Services.
But she said, "we may raise APRs and/or lower lines for customers who are showing signs of increased risk or inactivity." The opposite is also true, she said.
American Express started sending letters to customers this month, notifying them that rates on some cards would increase by 2 or 3 percentage points in December. "We're in a difficult economic environment with weaker credit quality among consumers and small businesses," said Desiree Fish, vice president of public affairs for the company.
But the Federal Reserve might step in to more closely monitor rate increases and other industry practices that consumers have long complained about. Congress has also proposed tighter regulations of the industry. President-elect Barack Obama said on the campaign trail that he supports credit card reforms.
In the meantime, borrowers should closely monitor their credit cards and credit reports, consumer advocates said.
First and foremost, pay your bills on time, not just on your credit cards but on all your debts. That means not falling behind on your mortgages or student loans. "You need to do everything you possibly can to keep your credit score as high as possible," said Bill Hardekopf, chief executive of LowCards.com.
Also keep your debt utilization as low as you can. If you want to avoid having your account shut, use your card every once in a while but pay it off right away. Make sure you check what fees you will be paying for certain transactions such as balance transfers. And keep a close watch on your credit limit.
"If that goes down, you stand the risk of really incurring fees," Hardekopf said. "You could blow by your limit and once you do that, not only will you instantly get an over-the-limit fee, but then you will most likely get hit with an APR increase, so that the cycle continues."