Credit Card Limits On the Downslide

There seems to be growing outrage by some borrowers who are being notified by their credit card company that their credit lines are being reduced. This specific group that I am referring to is that group of borrowers who pay off their balances in full each month, never miss a payment, never come close to charging up the maximum limit on their credit card accounts, etc. etc.

These borrowers, with presumably very high FICO scores, are understandable upset by this action and perceive it as a negative consequence for being responsible. The truth is that the action really has nothing to do with them. Like the famous line in the movie, “Casino”, “…it’s always about the dollars.” Let me explain.

Credit card issuers have to account for the available credit line amounts for each of their credit card accounts. The aggregate amount of the unused lines has to be identified and the corresponding amount of cash has to be set aside as a reserve. This reserve impact the available amount of new money that the issuer can use for new accounts. For example, if your credit card account has a $5,000 limit and you presently have a balance of $1,000, the issuer has to make sure he sets aside $4,000 in case you go out on a shopping spree. That $4,000 that cannot be given to another customer.

It’s in the issuer’s best interest, particularly in this current climate, to reduce the total unused credit in order to have enough cash to meet operating expenses and to set aside cash for anticipated loan losses. Accounts that pay off their balances each month or use their credit card infrequently will be targeted first. In these uncertain times, you should keep a close eye on this – you never know when you might need that credit line for an unexpected emergency or to fill in a cash flow gap.

It’s always about the dollars….