Lower credit limits, card closures coming from Capital One and Discover
Citing mounting concern about the economy, these two major credit card issuers are both tightening the credit reins as a precautionary measure as our robust economic cycle gets a little long in the tooth.
“We’ve been talking caution for really probably two [to] 2.5 years at this point relative to credit lines,” Capital One Chief Executive Richard Fairbank said on the company’s earnings call.
“But within the last year or so, we’ve even kind of further dialed back on initial [credit] lines…not because of anything that we see in our own portfolio but really more out of this just kind of intuitive concern about the marketplace.”
The Capital One CEO went on to rattle off a list of early warning indicators like “rising interest rates, growing government deficits, trade-related issue[s] and also cumulatively some of the effects that’s been going on with consumer indebtedness.”
By the company’s own admission, Capital One says a third of cardholders have subprime credit, which is typically defined as having a score of 620 to 640 or lower.
Meanwhile, Discover CEO Roger Hochschild tells The Wall Street Journal his company is clamping down on its credit exposure in three ways:
- Reducing the volume of balance transfer offers to high-risk customers
- Canceling inactive credit cards
- Approving fewer personal loans
What this really means for you
Beyond the obvious — you could have less credit access because of either limits or outright cancellations — there’s a hidden danger here for your credit score.
Let’s look at the possible hurt from lower credit limits first. During the recession of last decade, it was common for credit card issuers to cut your limit down to your outstanding balance without any notice.
Should that pattern repeat this time around, that’s a problem because the amount of your available credit that you charge up accounts for 30% of your overall credit score, according to myFICO.com.
So let’s say you have a credit card with a $10,000 limit. If you’re carrying a monthly balance of $3,000 and your credit limit is suddenly capped at $3,000, then suddenly you’re using 100% of your available credit, which can decimate your credit score.
That’s yet another reason to always pay down credit card debt as quickly as possible!
Now on to the cancellation of inactive credit cards that we’re starting to see…
According to myFICO.com, the length of your credit history accounts for 15% of your overall credit score. So, ideally, you want to have between four to six lines of credit. Further, you want to maintain them throughout the years by using them each twice a year and paying them off immediately.
If Discover or anybody else cancels one of your credit lines for inactivity, that immediately is a strike against the length of your credit history. For this very reason, money expert Clark Howard has an ironclad rule about credit management: When you pay off a credit card, don’t close the account.
You shouldn’t close an account yourself, so don’t let a lender do it to you, either, if possible!