Amid a Troubled Economy, Credit Cards Cut Credit Limits and Cancel Cards
Last updated May 12, 2020
As the unemployment rate continues to climb due to the coronavirus outbreak, the banks that issue credit cards are taking defensive action by closing accounts and reducing credit limits.
“Credit card issuers are feeling a lot of risk right now because of the economy, and they’re cutting their exposure,” said Bill Hardekopf, chief executive officer of LowCards.com, a credit card comparison website. “One of the easiest ways for them to do that is to lower the credit limits for a number of their cardholders and close non-productive accounts.”
Most banks that issue credit cards were quick to start coronavirus relief programs; for example, allowing consumers extra time to pay bills and waiving late fees. The fear among financial institutions is that these short-term accommodations will result in big losses.
A survey done in late April by CompareCards (another credit card comparison website) found that 25 percent of credit cardholders had their credit limit involuntarily reduced and/or their card canceled in the past 30 days. That would represent 50 million cardholders.
Checkbook asked the American Bankers Association (ABA), which represents many of the financial institutions that issue credit cards, about these defensive maneuvers.
“In response to the coronavirus pandemic, many issuers are supporting their customers by offering flexible bill payments and by waiving late fees and interest,” said Jeff Sigmund, ABA’s senior vice president of public relations. “Banks are taking a balanced approach informed by economic data, which is consistent with legal and underwriting obligations to ensure credit lines match consumers’ ability to repay.”
Yes, They Can Do That
“Most people don’t realize how much freedom credit card issuers have to cut limits or even cancel cards without warning,” said Ted Rossman, industry analyst at comparison site CreditCards.com. “And there is precedent; many issuers lowered credit limits even for the most creditworthy cardholders during the 2008 financial crisis,” he said.
This usually happens for one of two reasons, Rossman told Checkbook:
- You have a dormant card (one that hasn't been used in a while). You can avoid cancellation by periodically making a small purchase and paying it off right away or by transferring a recurring payment to it, so there’s regular activity.
- You show signs of financial distress, such as paying late, your credit score has fallen, or you’ve maxed out the card. Remember, bumping up against credit limits lowers your credit scores.
When you’re out of work with no money coming in, that credit card may be your only lifeline, so having a high balance may be unavoidable. But if you can, try to pay down those balances to get some separation between your credit limit and how much you owe.
“And if you’re in a financial bind, contact the card company,” Rossman advised. “It’s better to be proactive. Don’t make them chase you down if you’ve fallen behind.”
Lower Credit Limits and Canceled Cards Can Instantly Hurt Your Credit Scores
The computer programs that generate credit scores consider five factors. Payment history (35 percent) and credit utilization (30 percent)—the amount you’ve borrowed vs. your available credit—are the two most important factors.
If the credit card company lowers your credit limit or cancels a card, your credit utilization automatically goes up—even though you didn’t do anything—which makes you look like a riskier borrower. This will hurt you even if you don’t carry any debt and pay off your credit card bills in full each month.
Here’s the math: Let’s say you charge $2,000 a month on your credit card and your credit limit is $10,000. Your credit utilization rate is 20 percent. Anything under 25 percent is really good. If the credit card issuer reduces your credit limit to $5,000 and you still spend the same $2,000 each month, your utilization rate jumps to 40 percent and that could drag down your credit scores.
“The credit scores are looking at how much of the available credit you're using day-to-day, rather than do you carry balances month-to-month,” said Liz Weston, personal finance reporter for NerdWallet and author of Your Credit Score.
“This is true whether you're carrying a $3,000 balance month-to-month or you regularly pay off that $3,000 bill each month.” Weston said. “That amount is going to look bigger now to the credit scoring formulas because your total available credit was reduced––and that can hurt your scores.”
A lower credit score could:
- Make it harder or impossible to obtain a loan.
- Result in higher interest rates on credit cards and other loans.
- Make it more difficult to rent an apartment.
- Hurt your chances of getting a job (employers in some states are allowed to check your credit score—with your permission—but they cannot see your entire credit file).
- Trigger higher insurance premiums (in states that allow insurance scores to be used this way).
So, what can you do?
If you can charge less and/or pay down those unpaid credit card balances that will help, Weston said. If you are still employed, have a steady income, and are a long-time customer, you might want to appeal the decision and ask to have the limit put back to where it was.
Credit Card Issuers Have Also Changed Rewards Bonuses
Credit card companies make money every time you use their cards, so they want to give you an incentive to use them. To do that, most of the major U.S. card issuers have modified their rewards programs to automatically shift bonus rewards to what their customers are spending money on right now.
With few people traveling, most rewards cards have boosted their rewards for spending on groceries (including delivery), at restaurants (including takeout and delivery), and streaming services. For some cards, the bonus rate is now as high as six points or miles per dollar.
Many credit card companies and airlines are making it easy for their cardholders to donate their rewards to charities. For example, American Express customers can use JustGiving to convert points into dollars.
Keep in mind: You should never buy things you would not normally purchase to earn rewards. A rewards card only makes sense for people who pay off the balance in full each month. Even one late payment a year will more than wipe out any rewards you might earn.
Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He is also the consumer reporter for KOMO radio in Seattle. You can also find him on Facebook, Twitter, and at ConsumerMan.com.