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Urban News Staff Reports
One in four American credit cardholders said they’ve involuntarily had their credit limit slashed on at least one of their credit cards or even had a card closed by their issuer in the past 30 days, according to a new report from CompareCards.
A quarter of credit cardholders saw their limit slashed and/or their card closed altogether in the past 30 days and 3 in 10 cardholders are using credit cards “more than ever” since the beginning of the coronavirus pandemic. Forty-two percent are using their credit card the same as before, and 27% are using their card less and 41 percent of Americans don’t know that their credit card issuer can generally cut their credit limit without notification.
Matt Schulz, Chief Credit Analyst for CompareCards by LendingTree said, “I’m not surprised that credit card issuers are reining in available credit, but I was definitely surprised by just how widespread it already is. That means that millions of Americans are going to be without a lifeline that they may have been counting on to get them to their next paycheck or unemployment payment, and that’s troubling. No one wants to have to rely on credit cards to act like an emergency fund in tough economic times, but that’s the reality for many Americans.”
After analyzing the data from this survey, CompareCards analysts were surprised by the large number of cardholders who said they had their credit limit slashed or their credit card closed involuntarily. Because of that, the team ran the survey a second time in order to confirm the findings. After analyzing the second round of data, analysts are confident in presenting the original set of data here.
The results showed that nearly 50 million American credit cardholders said they have had their credit limit slashed or their card closed in the past 30 days.
Why would an issuer cut credit limits? To minimize risk. In good economic times, banks are more than happy to give cards and bump up credit limits for good borrowers because lenders are confident that they’ll get repaid. In uncertain economic times, when a consumer’s financial life can literally be turned upside down in a day, banks get nervous. That available credit suddenly looks like an untenable risk, so banks often rein it in, to the chagrin of the cardholder.
Big impact at a tough time for cardholders
While the moves make bottom-line sense for card issuers, they don’t make it any easier for cardholders, as for many of them, the reductions and closures come at the worst possible time.
Complicating things more, banks aren’t required to inform cardholders that their limits are being slashed, except in a few cases. (For example, if a reduced credit limit leads to an over-the-limit fee being charged to the cardholder, the fee cannot be charged unless the bank gives the cardholder 45 days’ notice.) For most other major changes to a credit card’s terms and conditions – think APRs and annual fees – the Credit CARD Act of 2009 requires issuers to give cardholders 45 days’ notice before a change can be made.
Just 16% of respondents said they knew that their issuer typically didn’t have to inform them about the lower credit limit. That means that an awful lot of cardholders may get an unpleasant surprise at just the wrong time.
Add in the fact that 30% of cardholders said they’re using their credit cards more than ever since the beginning of the outbreak, and you see that these limit reductions and card closures can have a major impact on cardholders’ budgets.
Reduced limits can hurt your credit, too
Lower credit limits and closed credit cards don’t just impact how much consumers can spend using credit cards, but it can also have a huge effect on credit scores. That’s because the credit utilization rate can take a hit as a result.
The utilization rate is calculated by comparing outstanding balances to how available credit you have. If you have a $1,000 balance and $5,000 of available credit, your utilization rate is 20%. However, if your credit limit shrinks to just $2,000, your utilization is suddenly a sky-high 50%, and your credit score will likely pay a price.
Utilization rate is the second-most important factor in credit scoring formulas, second only to payment history. A big hit to utilization rate will likely negative impact the overall credit score, an additional hurdle that no one whose financial lives have been flipped upside down by the coronavirus outbreak needs to face right now.
The bottom line: Take steps to minimize the damage – or possibly avoid it altogether
Ultimately, there’s nothing consumers can do that is guaranteed to keep a bank from reducing credit limits or closing a credit card account altogether. The bank will do what it is going to do. But there are a few steps that can help.
- Ask your issuer to reconsider. Chances of success may not be high, but it is worth asking.
- Don’t just focus on a single card. If you typically just use the same card for every purchase, consider changing things up for a bit. That way, you’re able to breathe some life into a once-dormant card without taking on any extra expense.
- Move small recurring payments to a dormant card. Subscribe to Netflix, Spotify or other streaming services? Consider moving these small recurring charges to a little-used card instead, and then set up autopay to handle the payments. That regular $10 to $20 charge keeps your card active without adding any unnecessary expense to your budget.
- Ask for a limit increase on another card. This can help you recoup lost available credit and salvage your utilization rate. In normal times, these requests are often granted. Today, however, issuers will likely be stingier. The exception: If you can prove that you’ve been financially impacted by the coronavirus outbreak and apply for help through an issuer’s hardship program.
- Get another credit card. Same as above. This can help you replace the available credit you lost, but it will likely be harder to be approved today than it was just a month or two ago.
- Keep credit in perspective. In times of financial crisis, there are more important things than protecting your credit score. Prioritize what needs to be taken care of first, like keeping the lights on, putting food on the table and asking for help from your lenders.
Schulz adds, “You have to be proactive. No one cares as much about your money as you do, so ultimately, the onus is on you to protect what you have and do what’s best for you and your family.”