Lower credit-card limits trimming credit scores

Wayne Brown has a dilemma. He said if he reduces his credit-card balance, American Express will cut his credit limit to the amount of the new balance. 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 score drop to 650 from 760 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 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 American Express, Citigroup and JPMorgan Chase have cut credit limits to guard against risk and prevent delinquency and charge-off rates from increasing, said Arnold.

The average charge-off rate, reflecting loans the banks don't expect to be repaid, was 7.1 percent in January, compared with 4.6 percent a year earlier, according to data compiled by Bloomberg.

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.

He said consumers should beware of teaser rates and high fees when transferring balances.

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

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, and Capital One Financial increased the rates for new customers on 15 cards, according to Bill Hardekopf, chief executive of LowCards.com, a Web site that compares the rates of almost 1,100 credit cards.

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 spokesman Samuel Wang.

In 2008, Chase decreased credit lines or closed accounts totaling $129 billion, Gordon Smith, JPMorgan's chief executive of card services, said last month. Credit lines to new and existing customers were increased by $107 billion, Smith said.

Critz George, a retired nuclear engineer and physicist in Albuquerque, N.M., 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 also a mortgage broker, 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."