Buzz
As the coronavirus pandemic reached the U.S., credit card companies introduced customer support initiatives, allowing payment delays or offering other changes to help during uncertain times.
However, beneath this assistance, the pandemic is affecting the credit card sector in other ways that may influence your financial situation.
Credit card issuers are beginning to scale back on introductory offers for new customers and are even lowering credit limits for existing cardholders.
A CompareCards survey revealed that 25% of credit cardholders had their credit limits reduced or their accounts closed in the last 30 days. Based on this data, the site estimates that nearly 50 million cardholders have faced a credit limit reduction or account closure.
The survey, released today, showed that baby boomers were affected far less than Generations X, Y, or Z, but users across all income brackets have been impacted.
41% of the respondents were unaware that their credit card issuer could lower their limit without prior notice.
Creditors are taking significant steps to mitigate risk.
Discover Financial Services has acknowledged that it is scaling back efforts to attract new customers, according to Bloomberg, and is offering smaller credit lines to those customers. The same article also mentioned that Synchrony Financial, which manages many store credit cards, will reassess some customers' creditworthiness, potentially adjusting their credit limits.
And it’s perfectly legal. Federal regulations mandate that card issuers must notify you 45 days in advance if your interest rate is going to change. However, in most situations, they can adjust your credit limit or decide to close your account at any given moment.
One reason why credit issuers are scaling back is due to the customer assistance programs they've set up to help those struggling to meet regular payments. Capital One revealed that 1% of its accounts are enrolled in these assistance options, the Wall Street Journal points out, which may sound minimal but is significant considering the company has roughly 120 million credit card accounts in the U.S.
Another factor is that consumers aren't spending like they normally do. Many are focused on paying off their existing debt while managing essential costs, rather than spending on travel or leisure activities. Store credit cards, in particular, are seeing less usage, especially with fewer people shopping in malls. This raises two concerns: less consumer spending and card networks earning fewer swipe fees.
The credit landscape shifted quickly
Then there's the overall state of the economy. “There’s a lot of unused credit available now that seemed safe a month ago but now feels extremely risky,” said Matt Schulz, chief credit analyst at Lending Tree (parent company of CompareCards). “When unemployment rises and the economy shifts abruptly, everything changes for the banks.”
So if you were approved for a premium rewards card in January or received a credit limit increase last fall, that's not unexpected. However, just as you might be working to minimize your own financial risk by cutting back on unnecessary spending during the pandemic, credit card issuers are also aiming to reduce their risk. Credit tends to fluctuate—following the 2008 financial crisis, credit limits and new sign-up offers were also tightened.
Yet, the financial uncertainty from that time, though still vivid in many people's memories, seems relatively minor when compared to the challenges of today’s pandemic-driven economy when you examine the numbers.
“Many people are seeing their credit limits cut just when they need them the most,” Schulz explained. “If you're relying on a credit card to get you through until your next paycheck or unemployment check and your limit suddenly drops, it can create serious problems for you.”
What to do if your credit limit gets reduced
Banks are implementing broad, sweeping measures instead of targeting individual accounts, Schulz noted. Don’t take it personally if your credit limit was lowered—card issuers are making wide-scale cuts to reduce their lending risk, not analyzing every detail of your account to determine whether you’re employed or not.
If your account has been closed or your credit limit reduced, you can request your issuer to reconsider the decision. While it’s possible to have a credit limit decrease reversed, there’s no guarantee they’ll be willing to make that change—particularly in this current “new normal.”
To prevent your cards from being adjusted, try using the cards that often get forgotten in the bottom of your desk drawer, as dormant or infrequently used accounts are the ones most likely to be closed, according to Schulz.
This doesn’t mean you should rack up charges just to show you’re using your credit. Instead, consider switching the billing for a monthly subscription to an inactive card, or make a planned purchase and immediately pay it off.
If you’re looking for a new credit card, it’s still possible to get approved. Although it’s not as easy as it was a few months ago, Schulz reassured me that new credit isn’t exclusively for those with perfect credit scores. Signup bonuses for rewards cards are still available, and secured and credit-rebuilding cards are also still accepting applications.
