Credit Card Companies Are Lowering Your Spending Limit
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Here's your money briefing for Monday, April 27th. I'm J.R. Whalen for The Wall Street Journal. A lot of household budgets are being stretched to the limit during the pandemic. And for many of them, this would be the worst time for a credit card company to reduce their spending limit. But guess what? It's already happening.
They actually have way more latitude than most people realize when it comes to changing credit limits or even canceling cards entirely.
That's Ted Rossman from creditcards.com. Coming up, he'll explain how you can avoid the cancellation of your credit cards and whether it's a good idea to pay down your credit card debt with your stimulus money.
Why are credit card companies lowering consumer credit limits during the pandemic?
More than 26 million people have filed unemployment claims during the pandemic. With less cash coming in, many people are turning to credit cards to pay the bills. But consumers should know that their spending limit could be at the whim of the credit card company. Joining us with details is creditcards.com analyst Ted Rossman. So Ted, why would banks and credit card companies do this when many people are in dire financial shape due to the pandemic?
From the bank's perspective, they're nervous. They're worried that people may not be able to pay them back. They remember during the financial crisis when charge-offs exceeded 10%, so more than 10% of credit card bills were just completely unpaid. We went basically overnight from the lowest unemployment rate in 50 years to perhaps one of the highest. So I know it's really tough timing for consumers to be getting limits cut or cards canceled, but that's the bank's side of things.
Don't they have to alert customers when they do that?
They actually have way more latitude than most people realize when it comes to changing credit limits or even canceling cards entirely. The Card Act from 2010 had a lot of great consumer protections, but when it comes to credit limits, there's really a ton of flexibility there. So one thing I see a lot of is if you haven't used a card in a while, that's especially a ripe candidate for being canceled without warning. So if you wanna keep it active, and it's a good idea to keep it active, Maybe make a small purchase, pay it off right away. That'll keep you going. The other side is harder. If you're bumping up against your credit limit or if you've paid late or if your credit score has declined recently, these are other more troubling reasons why a limit might be cut or a card might be canceled.
The best practice there is to speak up at the first sign of trouble and try to get a break from the lender.
Is it just people with lower credit scores that would see their spending limit lowered?
It's actually everybody on the credit spectrum. We can look back to the financial crisis for some guidelines. I dusted off this 2008 Fed report that found that back then, 20% of prime customers had a credit limit cut or a card canceled without warning, and 60% of subprime customers experienced that. So obviously, it's higher likelihood if you're lower on the credit or lower on the income spectrum. But even some higher income and higher credit folks have this happen to them. On their recent earnings call, Synchrony mentioned that they are constantly reassessing credit lines. And they're a big issuer of store cards. And they tend to cater to more of a low income, low credit audience. So that's one specific example.
But I do hear other examples, even for more affluent folks to
Seems like this is the last thing people need considering what's going on. Are the credit card companies willing to listen to issues that people have?
It's really tough timing. The good news is that if you're proactive, help is available. That's really key. If you fall behind and they have to chase you down, they're probably not going to be very forgiving. But if you speak up and you ask for a break, Maybe they will lower your interest rate or let you skip a payment, sometimes even without interest. These hardship programs can protect your credit score as well. Almost all the big banks are offering help.
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