When Your Credit Limit Is Cut
Credit can be a useful financial tool. An overwhelming majority of Americans – 78% or 91.1 million of all households – have credit cards, and the average consumer has 5 credit cards which they use as a financial cushion. Credit cards can be a helpful source of funding when needed to pay for emergency or unique bills such as car repairs, unexpected medical bills, school-related costs, etc. as well as for everyday needs including groceries, clothing, fuel, postage and more.
Prior to the global recession financial institutions were exceedingly generous in extending credit to consumers…perhaps too generous. According to Cardratings.com, from 1996 – 2005 the total number of bank credit cards issued increased by 46%. Frequently credit card companies would allow cardholders to borrow a significant amount of money compared to their annual income. Cardholders could run up very high balances – often at a high interest rate – and even make payments late or miss payments without losing charging privileges.
A lot in the financial world has changed since the credit crisis of 2007 – 2008, including that credit card companies have changed how they do business. They are tightening up their standards which means they are:
- not mass-mailing out nearly as many “pre-approved” applications for credit cards to households nationwide
- requiring people to provide proof of income and/or assets before approving them for a credit card
- approving new card applicants for lower credit limits and higher interest rates than in the past
- increasing the interest rate they charge cardholders for borrowing money and carrying a balance
- instituting and/or increasing fees (i.e. annual fees)
- increasing the amount of penalties (i.e. late fees)
- lowering cardholders’ credit limits – the amount of money a cardholder can borrow and/or charge