Lenders are cutting limits and canceling cards during the pandemic. Here’s how to protect your finances.

About 70 million Americans have seen their credit card limits reduced or their cards canceled entirely in the past two months, according to a new survey from CompareCards, a division of online marketplace Lending Tree.

These cutbacks mean that many cash-strapped Americans will find it more difficult to access credit during the coronavirus pandemic. Still, there are some steps cardholders can take now to reduce the risk of lower credit limits.

The survey found that about a third (34 percent) of cardholders had their credit limits reduced on at least one card between mid-May and mid-July. Most credit limits were cut by $1,000 or less, but 22 percent were lowered by at least $5,000.

One in four cardholders reported that they had at least one credit card closed by their card issuer.

“These huge numbers show that card issuers are reducing credit for people of all income levels as they seek to limit their risk from potential defaults,” says Matt Schulz, chief credit analyst at Lending Tree. 

In the months ahead, more cardholders can expect to have their credit card limits slashed or to have little-used accounts closed involuntarily, Schulz says.

The Credit Crunch

Lenders are taking these steps now because they want to protect themselves from an expected tidal wave of consumer defaults triggered by worsening financial hardship during the pandemic. Some major banks have increased their reserves by billions of dollars to cover their potential losses. 

“In the 2008 to 2009 recession, lenders saw losses from defaults jump by 50 percent, but this time around, the losses could be much higher if the economic picture does not improve,” says Emre Sahingur, senior vice president of predictive analytics at VantageScore, a credit scoring company.

Banks say they are doing what they can for customers in these difficult times. “In response to the coronavirus pandemic, many issuers are supporting their customers by offering flexible bill payments and by waiving late fees and interest,” says Jeff Sigmund, a spokesperson for the American Bankers Association. “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.”

For consumers, though, the credit card cutbacks sometimes arrive with little or no warning. Although most cardholders in the CompareCards survey said they were sent notification of the credit reductions by issuers, 1 out of 10 said they were not given a heads-up. 

“Lenders generally don’t have to give much notice about card cancellations or credit reductions, written or otherwise,” says Chi Chi Wu, a staff attorney at the nonprofit National Consumer Law Center.

The CompareCards survey found that lenders often did give reasons for the credit changes, with half of cardholders saying they were told it was because of a credit score decrease or a late payment. About 1 in 4 said they were told the change happened because of inactivity in the account.

Cardholders with the highest incomes were most likely to see their credit limit reduced or have a card canceled, the survey found.

“People with the highest incomes tended to have higher credit limits, which pose a bigger risk to issuers in event of nonpayment,” says Schulz at Lending Tree.

Among the different age groups, millennial borrowers were also hard hit, the survey found. Compared with boomers and Gen Xers, millennials tend to lack long credit histories, and many had focused on rewards from travel cards, which have been used less during the pandemic.

New Forms of Credit Scoring

To help lenders reduce the risk of defaults, FICO, the company behind the well-known credit score, recently launched a tool called the Resilience Index.

Using the same credit report data that goes into the FICO credit score, the Resilience Index analyzes factors that best identify borrowers who are likely to maintain timely payments in a downturn—and those who are not.

Among the predictive factors are length of credit history and whether consumers have opened new credit accounts recently. The index rates consumers from 1 to 99, with lower scores indicating better creditworthiness.

“Those who take on a lot more recent credit, or have shorter credit histories, tend to be less resilient than those who are more stable, even if they have the same credit score,” says Sally Taylor, vice president at FICO.

Lenders are only starting to test the effectiveness of the new index, and it could take years before its use is widespread. Still, some credit bureaus are making it available to consumers. You can also check out your resilience score on myFICO’s consumer website, at myfico.com (requires an advanced or premier membership, starting at $30 per month).

For now, most card issuers are using internal risk tools, such as algorithmic formulas, to cut back on credit and reduce their exposure to defaults, says John Ulzheimer, a credit expert who has worked at FICO and Equifax, another credit reporting company.

But consumer advocates say these black-box credit scoring formulas can put cardholders at a disadvantage.

“The wave of cancellations and cutting short credit lines underscores the lack of transparency in credit decisions, which could hurt consumer credit scores, and that’s particularly worrisome in a pandemic,” says Christina Tetreault, financial policy manager at Consumer Reports.  

What to Do

It’s impossible to completely guard against a lowered credit card limit or card cancellation. Even if you’ve had a card for years and used it responsibly, an issuer may still decide to cut back your credit, says Wu at the National Consumer Law Center. But these steps may help you minimize the risk of a credit crunch.

Keep a close eye on your accounts. It’s easy to miss a letter or an email notification during a pandemic, so double check your accounts online for any changes. You will also want to review your credit report periodically for errors that may lower your score and prompt an issuer to cut your credit.

The pandemic has focused more concern on credit reports, so the three major credit agencies—Equifax, Experian, and TransUnion—are offering free weekly reports through April 2021. (Normally you can get a free report only once a year from each.) Go to AnnualCreditReport.com. 

Limit the credit you use. If you carry high balances on your cards, you are likely to drive up your credit utilization ratio—the amount of available credit you use, which accounts for 30 percent of your credit score. A high utilization ratio can lower your score. If your card issuer lowers your available credit, your utilization ratio will go up even if your spending remains the same.

Be aware that paying off your balance in full each month might not help you stay below the 30 percent limit because card companies report utilization rates once a month, usually at the statement date, before you pay your balance. If you use your card a lot and carry a balance, consider making an extra payment during the month to reduce it, and your utilization ratio, before the statement even comes out, says Ted Rossman, an industry analyst at CreditCards.com.

Use your credit cards regularly. Although you don’t want to use too much credit, you need to make transactions on all your cards periodically. Credit card issuers are more likely to lower limits or cancel cards for accounts that are little used, says Ulzheimer, who recently had credit limits lowered on two of his own infrequently used cards.

If you have any credit cards gathering dust in your wallet, use them for small monthly payments, perhaps for a subscription service such as Spotify or Netflix, Schulz says. 

Avoid late or missed payments. If you consistently pay late or miss payments entirely, it can be a red flag that something may have changed in your financial circumstances, triggering a credit reduction. Set up autopay to protect your payment history. If you can’t pay the full amount, at least schedule the minimum payment. 

Talk to your card issuer. If your credit is lowered, and you have a good credit score, ask the issuer to have your original limit restored, says Rossman, who was successful when he asked his bank to reverse a credit limit reduction in June.

If that doesn’t work, try asking to have your limit increased on a card issued by a different bank. But check first to see whether that will require a hard pull on your credit, which could hurt your score temporarily.  Another option may be to apply for a new card with a different issuer, but in the current economy, lenders may be reluctant to offer one. 

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