Credit Card Companies Tightening Credit Worthiness Criteria
|June 23, 2008||Posted by Roshawn Watson under Uncategorized||
By: Roshawn Watson
Having an untarnished credit record may no longer keep you in the good graces of the credit card companies.
Due to increasing financial challenges, credit-card companies are beginning to meticulously examine individuals’ credit-worthiness. In addition to FICO scores (Fair Issac’s Credit Organization), credit card companies are beginning to delve deeper into customers’ personal lives, e.g. their locations and industries. Initial efforts are being focused on areas most affected by the housing crunch, such as California, Nevada, and Florida. Also, certain industries, such as the finance and construction, are also being targeted.
However, other customers are also feeling the changes. For example, one Atlanta television-production company owner’s credit limits were slashed by American Express on three cards from $6,000, $6, 000, and $42,000, to $1,000, $1,000, and $4,300, respectively. Although he routinely paid his balances in full each month, American Express apparently disliked his lack of disclosure to Dun and Bradstreet (a credit monitoring firm for small businesses). Nonetheless, this example reflects a broader trend of credit-card companies developing more stringent criteria, even for those who pay their bills and who spend a great deal of money.
The sudden change reflects banks attempt to mitigate losses from their consumer credit-card businesses. For example, Washington Mutual (WaMu) expects credit-card losses to increase from 6.7% in 2007 to 9.5-10.5%, and JP Morgan expects credit card losses to increase from 4.37% in first quarter of 2008 to 6.0% next year. Accordingly, over 30% of banks say they have tightened lending criteria between January and April. Moreover, these more stringent criteria even affect new applicants and existing applicants with no red flags based on their credit scores.
These changes include
Requiring higher FICO scores
Decreasing automatic credit limit increases in areas most affected by the housing crunch
Decreasing marketing in areas most affected by the housing crunch
Lowering the credit-limits of individuals identified as being at increased risk
Making special payment arrangements for individuals at increased risk.
Waiving or reducing fees
Cardholders who are cut off from credit likely will not have much luck with pleading their cases to customer-service representatives because the card issuers are trying to limit future losses. It is a very delicate situation for credit card- companies: to limit exposure without tarnishing their brand. For consumers, it is even more difficult because a lower credit-card limit may accelerate their debts going bad. It is important to note that credit card debt is not the true problem but rather the symptom of the problem: for many the problem is using borrowed money to solve their financial problems. Assuming that cardholders still intend to pay their balances, a lower limit could be doing consumers a favor, preventing the debts from escalating to outrageous amounts.
Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.