Credit Line Reductions

Last week I wrote that banks were really starting to limit the origination of new consumer loans and credit cards.  This week we are hearing that more and more existing customers are getting their credit lines and credit card limits reduced.   A story broadcast on Yahoo has some more information.  See  You really need to be aware of this so you don’t go over your credit limit.  Exceeding your credit limit puts you in a position where you think you are financing something only to find out you need to pay cash for it at the end of the month.  This can also result in higher interest rates, as well as adversely affecting your credit score. 

Do not assume you will be notified first.  I am personally aware of instances where customers were notified after the credit line and credit card limit were cut.  Also, do not assume that your credit card transaction will not be authorized if it goes over your limit.  Many cards allow you to exceed your limit as long as you pay down the card upon receipt of your statement.  Further, do not assume you will be unaffected because you have good credit and pay on time.

Basically, banks are trying to limit the amount of credit they have outstanding to their customers.  So they are cutting back everywhere on all types of credit products.  The first wave of this started 6 months ago when lenders started cutting back and freezing home equity credit lines.  They were cut severely and swiftly without regard to credit history or original loan to value ratios.  Lenders were highly motivated to do this by the rise in foreclosures.  Small and large businesses have seen similar treatment due to the downturn in sales.  Now it is really starting to kick-in for the consumer.  The recent unemployment numbers foretell massive defaults on consumer loans and credit cards.  Banks are therefore very motivated, so expect swift cuts.

Personally, I would approach larger purchases this way.  Pay cash or don’t buy.  If you absolutely need to purchase on credit, make sure the financing is available.  It may not be tomorrow.

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