American Express, Chase Cut Card Limits, Lowering Credit Scores

Wayne Brown has a dilemma. If he reduces his credit-card balance, American Express Co. will cut his credit limit to the amount of the new balance, he said. If he doesn’t make a big payment, his interest rate may skyrocket.

The credit limits on Brown’s cards have been lowered, which has raised his debt relative to his available credit. This so- called utilization rate is a key factor in determining credit scores. Brown, a 58-year-old construction company owner in San Diego, has seen his credit score drop to 650 from 760 over the past 13 months.

“Interest rates on all of my cards are going up now and my minimum payments are almost doubling because it looks like I’ve maxed out my cards,” said Brown, who uses credit cards to fund his home-building company. “It’s a Catch-22.”

About 45 percent of U.S. banks reduced credit limits for new or existing credit-card customers in the fourth quarter of 2008, according to a Federal Reserve January survey of senior loan officers. Financial institutions may slash $2 trillion in credit- card lines in the next 18 months, Meredith Whitney, a former Oppenheimer & Co. analyst, wrote in a Nov. 30 report.

“You’re no longer immune if you have good credit,” said Curtis Arnold, the founder of CardRatings.com, a Web site that reviews credit cards. “The issuers hold the cards, literally.”

Credit-card issuers such as New York-based American Express, Citigroup Inc. and JPMorgan Chase & Co. have cut credit limits to guard against risk and prevent delinquency and charge- off rates from increasing, said Arnold, who is based in Little Rock, Arkansas. Charge-offs are loans the banks don’t expect to be repaid and were 7.1 percent on average in January compared with 4.6 percent a year earlier, according to data compiled by Bloomberg.

Pay Off Balances

If credit-card limits are decreased, consumers should pay off balances as quickly as possible, consider making online payments before the monthly statement arrives to reduce debt and weigh transferring balances to a card with a lower rate, said Jeff Blyskal, a senior editor of Consumer Reports. Blyskal, who is based in San Francisco, said consumers should beware of teaser rates and high fees when transferring balances.

“Don’t cancel the card to spite the card company because you’ll just hurt your own credit,” said Emily Peters, San Francisco-based personal finance expert at consumer Web Site credit.com.

Cardholders will damage their credit history if they cancel an older account and lose the available credit on that card, she said. Credit-score companies look at the total amount of debt relative to credit limits on all credit cards when evaluating scores.

$300 Offer

American Express, the largest U.S. credit-card company by purchases, is offering $300 to some customers if they pay their balances in full by April 30 to reduce the risk of defaults.

Chase increased the minimum payment to 5 percent from 2 percent for certain borrowers with large balances, Capital One Financial Corp. increased the rates for new customers on fifteen cards and Citigroup and Bank of America Corp. began charging a 3 percent fee for all transactions made outside the U.S. in U.S. dollars, according to Bill Hardekopf, chief executive officer of LowCards.com, a Web site that compares the rates of almost 1,100 credit cards.

Consumers are falling behind on credit-card payments as U.S. unemployment reached 7.6 percent in January, the highest rate since 1992.

Charge-Off Rates

American Express’s charge-off rates of loans rose to 8.29 percent in January from 7.23 percent a month earlier, a 15 percent increase, based on Bloomberg data. Chase’s charge-off rates increased to 5.94 percent from 5.32 percent, a 12 percent jump.

Desiree Fish, a spokeswoman for American Express, said consumers’ overall debt levels relative to their financial resources is the primary factor for any credit-limit reduction. She declined to comment on the specifics of Brown’s case.

Citigroup is lowering credit limits because of the market environment and deterioration of consumer credit, said Samuel Wang, a spokesman for Citigroup.

Gordon Smith, JPMorgan’s chief executive officer of card services, said at an investor-day presentation on Feb. 26 Chase decreased credit lines or closed accounts in 2008 totaling $129 billion. Credit lines to new and existing customers were increased by $107 billion in 2008, Smith said.

Cardholders most likely to see credit limits slashed have large balances, delinquent payments or recent dips in credit scores, said Arnold of CardRatings.com. Consumers who don’t use their cards very often may also see limits cut because they aren’t profitable for issuers, said Peters of credit.com.

No Advance Notice

Critz George, a retired nuclear engineer and physicist in Albuquerque, New Mexico, said he had three Chase cards and one Citibank card closed because of inactivity, without advance notice. George, 71, said he fears having four lines of credit closed will lower his credit score. “I feel like it was an arbitrary and capricious decision because I have paid in full and on-time for the last 20 years,” he said.

Brown, who is a mortgage broker in addition to his construction business, said he was always careful to keep his balance at one-third of the limit. He said the reduced credit limits on his American Express and Bank of America cards have made that impossible.

“I’m angry because I’ve always been proud of my credit history and now it’s gone to hell, not because of something I’ve done.”