• AmEx is giving us a great big holiday gift Tuesday, December 8, 2009

    By J.G. Preston

    For Civil Justice Research & Education Project

    Penelope, a 26-year-old lawyer in her first job out of law school, learned first-hand an unintended consequences of newly enacted federal legislation cracking down on credit card companies:  Credit card companies are taking aim at consumers.

    Penelope, not her real name, had a balance of $450 on her American Express Blue Cash card that had a credit limit of $10,000.  So she didn’t think twice about using the card to purchase $2,000 worth of tickets for a vacation on the American Express travel web site.

    Credit cardsShe still doesn’t have the tickets.  Her attempts to use her card to purchase them were unsuccessful.  When she tried to find out why,  someone at AmEx finally told her that her credit limit had been reduced to $1,000.  That was the first Penelope had heard of the change.

    One of the reasons she was told her limit was reduced was that she wasn’t making enough money.

    “They gave me a $10,000 credit limit when I was in college making $10 an hour as an intern,” said Penelope.  “Now I’m an attorney with a stable job and I’m not making enough?”

    Penelope is far from alone.  Many consumers are learning their credit limits have been reduced — in some cases even more severely than Penelope’s was — just as the cash-flow crunch of the holidays arrives.

    “Credit card companies are definitely trying to limit their risk and are turning around their previous policy of increasing credit limits without much underwriting,” according to Consumers Union staff attorney Lauren Bowne.  “But they do it with no notice, which can be a problem for consumers who depend on those credit lines and pay them off on a regular basis.”

    Penelope suspects her credit limit reduction was triggered by her attempt to purchase the tickets.  When she first tried to make the purchase, she wasn’t told it would put her over her limit.  Instead she got an error message, then was contacted by someone from American Express looking for fraud — not unheard of when someone tries to make an uncharacteristically large purchase with a credit card.

    But that AmEx employee didn’t tell Penelope her credit limit had been changed.  She kept trying to make the purchase and kept getting error messages.  When she called the company, she was passed along to three different departments before someone told her her credit limit was now $1,000.

    “As of when?” Penelope asked.

    “As of today,” she was told.

    Penelope says she has never had a late payment on the account, or on any other debt.  She has always paid American Express at least the minimum amount due and has at times made more than one payment in a billing cycle.  Her balance had at one time been much larger but she had paid it down.  She says her only other debts are a mortgage on her Sacramento home and a student loan primarily from her time at McGeorge Law School in Sacramento.

    What angered Penelope at least as much as the reduction in her credit limit was the fact that she didn’t find out about it until she tried to make a purchase.

    “It’s unacceptable to have such a drastic change in my limit with no notice,” she said.

    An AmEx employee gave Penelope three reasons why her limit was reduced.  One, as mentioned, was she doesn’t make enough money; another was she has too much debt (in AmEx’s eyes).

    The third was that she wasn’t making high enough payments.  When Penelope asked how that could be true when she always paid at least the minimum amount she was asked to pay, the response was … silence.


    The inability to buy her vacation tickets — or anything else that would put her over her new credit limit — isn’t the only problem caused by the reduction.  Even though her balance hadn’t changed, her “debt utilization ratio” (the ratio between her balance and her credit line) had jumped dramatically.  That is one of the factors that goes into a credit score.

    If Penelope had other credit cards, a lower credit score would give those creditors an excuse to raise her interest rate…or lower her credit limit, which could in turn lead to further rate hikes or limit reductions.  And a lower credit score makes it more difficult to qualify for a mortgage or car loan.

    Connie Brooks addressed this in a blog on AskMrCreditCard.com:

    The problem with the unexpected credit limit decreases is simple – It wrecks your debt-to-credit ratio if you carry a balance. Your available credit limit makes up almost a third of your FICO score.

    Most readers that left comments were carrying well under 30% of their available credit from month to month. Now that their limits have dropped, they look like they are using nearly all of their credit. That alone is enough to drop their credit score.

    This is why the Consumers Union’s Bowne is fighting to require banks give at least 45 days notice of a decrease in credit limit, as they now must to raise interest rates or impose new fees.

    “That kind of notice would give consumers the ability to develop a strategy for dealing with the credit score implications,” Bowne said.

    Reductions in credit limits don’t just have an impact on credit scores.  It can also limit a consumer’s ability to deal with a financial emergency, especially when lenders reduce credit limits to just above the account balance.

    “One of the reasons consumers have credit cards is to have something there in case of an emergency,” said Josh Frank, senior research analyst for the Center for Responsible Lending in Durham, N.C.  “If as soon as the economy goes bad, credit lines go away, that’s obviously not much of a safety net.  Now the idea that you should take all your available cash and pay down credit card debt, because you would have access to credit in an emergency, no longer makes sense.”

    Frank said he thinks the trend to reduce credit limits is peaking and calls it an “economic cycle issue” brought about by charge-off rates of 10%, more than double what they were two years ago.

    The “Frontline” documentary series on PBS, in conjunction with The New York Times, produced an episode titled “The Card Game” that recently aired on public TV stations nationally.  According to Eric Mink in the Times:

    The program…springs from the enactment in May of the Credit Card Accountability, Responsibility and Disclosure Act of 2009. As the calendar counts down through a lobbyist-induced, eight-month delay to the law’s effective date, the card companies have been infuriating consumers by hiking rates on existing balances, lowering credit limits and inventing new ways to induce late payments and trigger multiple penalty fees.

    A report by Larry Abramson of National Public Radio earlier this year said credit card companies are dropping credit limits, even for good customers, because they’re having a hard time telling who is a good risk and who isn’t in this economy.

    “This is the problem with unemployment that doesn’t seem to be abating,” says David Robertson, publisher of the Nilson Report, a trade journal for the credit card industry. He says companies are poring over unemployment and foreclosure reports, trying to predict which borrowers in which parts of the country will run into trouble in the near future.

    “They’re trying to determine who the customers might be who today look perfectly good — able to pay their bills — but 60 days from now will unfortunately be out of work,” Robertson says.

    So, upstanding, bill-paying citizens might face a precipitous plunge in their credit card limit because of something that hasn’t even happened yet.

    The CARD Act does not include anything that will make it more difficult for credit card companies to lower a consumer’s credit limit.  No minimum notification is required.  The topic of lowering credit limits is addressed only in terms of requiring a study on the issue.

    CARD 2009

    The CARD Act was enacted when it was signed by President Obama on May 22, 2009.  That means the report on lowered credit limits, which could include “recommendations to the Congress on any regulatory or statutory changes that may be needed to restrict or prevent such practices,” isn’t due until May 22, 2010.

    But the language of the bill calls for examining how credit card companies lowered credit limits for a period ending on the date the bill was signed.  Any limit reductions that have happened since then — such as Penelope’s — wouldn’t be part of the study.

    For now, the Federal Reserve does not consider lowering the credit limit to be a “significant change” that would require a 45-day notice before implementation as required under CARD.  Consumers Union has asked the Fed to consider changing that stance before the final rule is issued, but there’s no assurance the Fed will do so.  Josh Frank of the Center for Responsible Lending said there seems to be a fear that if consumers had advance notice of a credit limit reduction, they would run up their balance before the reduction could take effect.

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