Credit Card Issuers Cracking Down On Consumers

As the credit crunch weighs on the financial services sector, credit card issuers are tightening lending terms with consumers to lower their risk profile, from cutting borrowing limits to closing dormant accounts.

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“Banks need to be more conservative in how they are lending," says Carole Kaplan, director of public relations at the American Bankers Association.

A survey of credit card industry executives in July found that 62 percent of their companies planned to reduce lines of credits because of economic conditions, according to Javelin Strategy & Research.

While changing a customers credit limit is nothing new, representatives of the largest cars issuers in the U.S., Bank of America, JPMorgan Chase and American Express, say they are increasingly cutting credit card limits for their customers because of the downturn. (Citigroup , another large credit card issuer, did not return calls in time for publication.)

Though American Express routinely changes the credit limit of 20 percent of its customers every year, more limits are being lowered than raised this time around, according to Kim Ford, a spokesperson at the company. This year, only one out of two customers saw an increase, versus four out of five in the recent past.

Ford says it reflects a change in the criteria used to assess riskier customers, factoring in such things as whether the card holder has a subprime mortgage, the geographic location of the home and whether home prices are falling in that area.

American Express is not alone. “We’re working more aggressively to control risk,” says Betty Riess a spokesperson at Bank of America , adding the company is also closing accounts of customers that have had a zero balance for over a year and have a riskier profile.

A spokesperson at JPMorgan Chase says the bank is also taking a second look at riskier customers as a result of economic conditions.

Like much of the credit crunch, the changes may mean little to those with the best credit or those who spend and borrow judiciously.

But cutting credit limits or closing accounts can have a negative effect on a consumer's credit score, or FICO, says Liz Pulliam Weston, a personal finance columnist and author of “Deal with Your Debt." That's because one way credit scores are calculated is by looking at the debt-to-available credit ratio. The closer the debt to the credit limit, the lower your credit score.

A credit limit reduction, for instance, can lower your credit score by 30 to 40 points, says Weston.

“It’s not consumer friendly,” says Ben Woosley, director of marketing and consumer research at CreditCards.com.

With lower credit limits, cash-strapped consumers, will have less of a back up— and in some cases none at all—when things get tough.

"It's going to, in turn, effect discretionary spending," says Bruce Cundiff, director of payments research and consulting at Javelin Strategy & Research.

So, here’s how to prepare for any changes.

Pay Attention

A change in credit lines or account closures will be communicated in writing. Woosley says consumers should check online statements as well as regular mail, as some of the notices can look like junk mail.

“You should know your credit score by checking it at least once a year, says Weston.

She suggests using myfico.com, and making sure there aren't any errors on the report.

Appeal The Decision

If you get a notice saying your credit limit is being reduced, you still have a chance to call up the company and try to reverse the decision, especially if you feel your credit score is in good standing. Sometimes, mentioning the possibility of changing card issuers can help. “Consumers still have some power,” says Weston.

Use Your Card

If you have a dormant, or inactive, card—one with a zero balance on a regular basis—use it for small purchases, recommends Kaplan. “It might be a good idea to go out and use it, so it doesn’t look like it’s sitting there unused,” she said.

Don’t Miss Payments

An obvious piece of advice, but worth repeating, try to pay your balance in full every month, avoiding interest and finance charges.

Companies are less likely to take action "if you have good credit," says Kaplan.

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