Credit Limits Going Down
Posted by John Draper | Filed under Credit Wise, In the News
I did CBC radio yesterday because everybody was talking about the “good news.” The central banks around the world are cutting interest rates. But all the hand clapping and “yipees” may be pre-mature. I’m not sure that Matt Gallloway, or the listeners, wanted to hear my very pessimistic take on the mess we’re in. But it’s a MESS we’re in. That anyone would think a .5% cut in the Bank of Canada’s rate would fix it is another example of how we don’t understand money and how it works.
One of the biggest mistakes people make when it comes to credit is that they simply don’t know the rules. It’s kind of like the way some people feel about their cars; as long as it runs, they don’t care how it works. Hey, I’m one of those people when it comes to cars, but I’ve at least been sensible enough to find out what the rules are to keep the sucker running, and follow them. Not so with most people and their credit. They don’t know the rules and one of the rules that’s about to bite a lot of people in the butt is this:
Credit card debt and unsecured lines of credit are “callable debt.” Yup. That means that at any time the lender can say, “Give me my money,” and borrowers have to cough it up.
No way, Gail. That can’t be true. Every time I tell people that credit card debt is callable and the lenders can ask for their money back at any time, this is their response.
Heads up folks, it’s a fact and American’s are learning just how it works.
Of the 20% of American Express clients who saw their limits reviewed as a part of normal operating procedure, FIFTY PERCENT saw their limits go DOWN. That means that to maintain a healthy credit ratio (remember, no more than 60% of you limit should be used) a lot of people are going to have to find the money somewhere, or reconcile themselves to watching their scores plunge. Someone with a $2,500 balance on a card with a $5,000 limit is using 50% of their credit line. But if that limit drops to $2,500, they’re now using 100% of their available credit, which is the biggest of no-nos.
In the U.S., a recent Consumer Action survey found that 75% of the banks questioned said they lower credit limits as a way to manage risk to protect consumers. Yah! Sure! Where was all that “protecting consumers” when they were throwing credit at people and upping limits at a wicked clip. Nope, they’re not protecting us. They’re lowering limits because money is drying up and they are scared. We should be wary too.
- Lower credit scores mean the cost of borrowing goes up.
- Lower credit limits means that consumers can’t just turn to their credit when they want to.
While many experts are suggesting you shop around for more attractive credit, I’m not sure how successful you’ll be in this lending climate. If your own lender wants to nail your shoes to the floor, why would some lender that doesn’t know you from Jack want to give you a better offer when the stakes are so high? Nope. Here’s what you should do:
Significantly lower the balance owned on your credit card. Hey, I’ve always been of the opinion that your balance should be zero after every monthly payment, but if you’re carrying a balance anywhere above or close to the 60% line, get to work paying that sucker off. The higher your balance, the more likely you are to fall under the lender’s microscope and find yourself with a lower limit.
Keep your eyes on the mail. If you’re like me and routinely dump what you think are dumb marketing letters, stop. Start opening and reading everything to make sure you know if this happens to you. Go over your monthly statement, including the credit limit box, and watch for interest rate spikes and new penalties.
Check your credit report. If you haven’t looked at your credit report in the last six months, now’s the time to do it. Be assured that your lender(s) will be. Even a small slip could have lenders looking closely at your potential risk of default and covering their asses with a lower limit, a higher interest rate, or both.
While I don’t believe we should be panicking — who makes a good decision when they’re panicking — I do believe we have to get our heads out of the clouds and start taking this mess seriously. I doubt you’ll hear a lot from me in the media because my message is simple and clear: get your debt paid off any way you can; this is no time to be spending money on crap! Not exactly the message the banks, the retailers, the advertisers want to hear, right?
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October 9, 2008 at 8:28 am
This message is just in time for Christmas shoppers. Unless all your ducks are in a row, it really seems ridiculous now to shop for anything extra. Now is the time to get creative with gifts and leave the cash in the bank where it belongs (or toward the creditcard repayment).
Inspiring post, Gail : )
October 9, 2008 at 8:37 am
Even secured lines of credit could be callable. At least mine is. The agreement clearly states that the bank can call back the loan at any time.
October 9, 2008 at 9:47 am
Then why do the prudent borrowers always tends to get hit with higher fees and rates? I thought about getting a secured line of credit to help finance a new (used
car. If it didn’t carry a $30000 balance for 3 months, they would charge me $499 set up fee. I don’t want $30 000- it would be irresponsible of me- go figure. Having been a customer at CIBC for 30 years- If the banks want to reduce limits and review borrowers- fine but set things up responsibly to begin with and start recognizing your good customers instead of encouraging the over-the-top-borrowers.
October 9, 2008 at 10:15 am
Jennifer, here’s where I think you threaten to vote with your feet. Talk to your bank manager, then their manager, then the bank president, then whoever. I’ve had great results just mentioning the fact that I’m thinking about leaving. In fact, I encourage all of Gail’s readers to regularly call bell, rogers, banks, whoever and say you’re thinking about leaving. They know the cost of acquisition for customers is quite high and are usually more willing to play ball than most admit. And if not, actually vote with your feet. This is a classic mistake that my parents make, which is that they are argue it’s better to be a good customer and not complain and stay with the bank/insurance/utility company a really long time to get a good deal. The problem is one of motivation — if you’re already a good customer, why would they give you a deal to stay?
October 9, 2008 at 10:56 am
My husband is 26 years old and makes about $43K a year. He recently applied for his first credit card…and they gave him a limit of $11000!! How absolutely ridiculous! (Don’t worry…we only use it for convenience on small purchases and pay it off every month!)
October 9, 2008 at 11:09 am
It’s happening. I got a letter for my Brick card a couple of months back saying they were lowering the available credit by $1000. I only have it for their no interest for 16 months deal, which will be done this Nov and fully paid for. It’s my other credit cards with low interest rates that I’m worried about and I’m working hard to pay off.
The really stupid thing is that HSBC (which runs the Brick’s credit card) keeps sending me personal offers for a $5000 line of credit! I guess their credit dept isn’t talking to their marketing dept…
October 9, 2008 at 12:23 pm
Gail,
Does the company have to notify you when your limit is going down? How much of a notice will they give you?
IB
October 9, 2008 at 1:47 pm
oh my. I just cruised the web for ecomic headlines around the world. Wow, no one is immune to this! Banks are being bailed out by their governments all over this lovely planet.
I think I will keep my head low, keep my balances zero as long as I can and hold onto my diversified RRSP the way it is (appalling just appalling!!) for now.
Hunkering down for the storm with some canned food (don’t forget the canopener), and a good supply of candles — metaphorically speaking — is the best way to go, I think.
October 9, 2008 at 2:04 pm
I am threatening to vote with my feet. The best deal they would offer me is to increase my unsecured credit line and reduce the interest by 0.25% for a grand total of prime +1.75% ( gee-thanks a lot) So I called ATB financial- guess what? $339 set up and prime -0.51% for the first year. Appointment on Oct. 18- Sounds much better to me!
October 9, 2008 at 2:19 pm
I know that this has less to do with achieving ideal credit terms, but I just came across this in the Globe and Mail that was interesting about married couples and having a complete picture of their finances. Certainly an interesting read that should get a few butts in gear.
http://www.theglobeandmail.com/servlet/story/RTGAM.20081009.wlgenex09/BNStory/lifeFamily/home
October 9, 2008 at 2:43 pm
This will not be limited to credit card balances. As the financial crisis unfolds, we will see home equity lines of credit, personal loans, car loans, business loans, and even mortgages called, all the while jobs are lost, companies close and unemployment soars.
Who knows what the future holds? As well as bonds, the government may issue food coupons, slash unemployment payments; provinces may make work mandatory for welfare recipients, or cut benefits altogether; cities may just stop removing snow or collecting garbage because they can’t pay their employees, just like the state of California at the present time. The same mess experienced in the US will catch up north of the border and everywhere else on the planet.
People in debt used to eating out may very well have their next meal out in a church basement. At least, it will be free.
October 9, 2008 at 3:50 pm
ib, no notice is required. most agreements say, “subject to change without notice.” g
October 9, 2008 at 5:27 pm
Is it not true that credit cards can also be a great tool? I use mine for big purchses grab the points towards the grocery bill and pay it off as soon as the bill is due. 6 weeks grace using their cash and leave mine in the bank.
October 9, 2008 at 5:59 pm
Goal “0″ Debt > There’s no doubt that if you use your cards wisely, pay the balance off in full and the CC doesn’t cost you anything… they are a great tool. I’m using my points from a CC to redeem for gift cards that I’ll use to buy gifts for people this Christmas. But if you ever pay any money in interest or fees… it’s not such a good plan anymore.
October 9, 2008 at 6:15 pm
Gail, I’m still confused.
How does lowering the Bank rate trigger banks to reduce credit limits on their cards?
Secondly, how do the central banks think that a lower bank rate will solve the problem? Is the problem a liquidity crisis (I have heard it called this)? What is a liquidity crisis? As I understand it, people do not have money to pay back their loans. How does lowering the interest rate help people pay back their loans if they don’t have the money to do it in the first place?
You’re right – I don’t know how the financial system works, and as events unfold it becomes more and more of a mystery to me.
October 9, 2008 at 6:45 pm
Gail, if you would allow me to answer Jim’s questions…
Lowering the bank rate has nothing to do with reducing credit limits. Credit limits have to do with the willingness of the banks borrowing money to the credit card holders. If the banks don’t want to borrow so much money out to the credit card holders anymore, they would reduce our credit limits.
The bank rate has more to do with people who already owe money. By lowering the interest rate, it should encourage people to keep up with their payments. By decreasing the monthly payment, the payment amount would decrease as well. More and more people find themselves not able to keep up with the payments because other costs of living (e.g., gas, food) have gone up as well. And since their wages might not keep up with all those increasing prices, some peole find that they suddenly cannot afford to make their monthly payments. So, if you decrease their monthly payment by decreasing the interest rate, they would suddenly find themselves able to afford the payments.
Poeple who don’t have the money in the first place should have never got a loan or used their credit cards at the beginning. It’s too bad that banks, often time in the past, approve loans for those people.
October 9, 2008 at 10:00 pm
I’m pretty sure mortgages are callable too, which is slightly scary. I know I’ve heard of mortgages being called in the past. Just another reason to get that sucker paid off too.
October 10, 2008 at 11:35 am
Jennifer:
I don’t remember any set up fees on unsecured LOC. I heard of fees for secured if you use your mortgage as collateral (fees in the range you mentioned). Shop around.
October 10, 2008 at 11:50 am
Angela, you did a good job with that explanation.
Jim, the money that the banks lend us comes from one of two places:
a) the deposits we give them, and
b) money they borrow.
If they borrow a buck at 4% and lend it to us at 6%, the difference, called “the spread” is their profit. When the Bank of Canada lowers it’s rate, the banks can borrow for less. Sometimes they pass it on to us to keep us borrowing. Sometimes they don’t.
Recently, with there being less money available — the liquidity crisis — banks have been paying more to borrow. But they have not been passing all their increased costs on to us because they were afraid to scare away the borrowers with too-high rates. Instead, their profits have been taking the hit.
Now there’s no more manouvering room. We don’t have enough money to cover all the credit that’s been extended. We’re up the creek without a paddle. And some of our boats are springing leaks.
October 10, 2008 at 11:58 am
also, keep in mind what a ‘good borrower’ is. your definition and the banks definition are totally different. someone who keeps a low limit and pays off their balances is NOT a good customer. they make them no money. so if you find yourself confused, it’s because you are thinking of them as a person, and not a self feeding corporation.
if you want to watch a neat documentary about money, watch zeigeist and the sequel zeitgeist-addendum (esoteric agenda is good too, but focuses more on world stuff and food supply). they are the number one watched movies on you tube now. it talks about the origins of the money system in the states. pretty neat.
October 10, 2008 at 7:58 pm
Jennifer, were you asking to secure the line of credit agains’t the car you are purchasing? I haven’t heard of a set up fee for a unsecured LOC either.