Credit Card Limit Cuts: The Surprising Truth

By Eileen AJ Connelly, AP Personal Finance Writer

MINNEAPOLIS (AP) — Credit card companies slashed limits for an estimated 58 million card holders in the 12 months ended in April, even though a high percentage had good credit scores when their limits were cut.

The widespread cuts affected about a third of consumers, but most people did not see a big impact on the credit scores, according to a study by FICO, the company that produces the most widely known credit scores. The limited effect may be because lenders often cut limits on cards that were unused or lightly used.

The statistics in some ways verify complaints from consumers that they were targeted despite doing nothing wrong, but also show that the cuts seem to have little negative effect for the majority of people.

FICO, formerly called Fair Isaac Corp., separated the cuts into two waves as it examined data provided by credit reporting agency Equifax. About 25 million card holders saw their limits cut between April 2008 and October 2008. Limit cuts jumped 32% in the following six months, as the economy faltered and banks looked for ways to cut risk.

Focusing on the 33 million card holders in the group that saw cuts between October 2008 and April 2009, FICO found the majority had strong credit histories.

About 73% of the group, or 24 million, had credit limits cut despite no new negative information in their files. Lenders may have used information not in credit reports to decide whose credit limits to cut, FICO spokesman Craig Watts said.

FICO said this group had a median credit score of 760, on a scale of 300 to 850. That's above the median score in the U.S., which stands at 723.

The results support the perception voiced by many consumers that the cuts to their credit limits took place despite holding up their end of the bargain by making on-time payments, said Gail Hillebrand, senior attorney with Consumers Union. "The consumer perception that 'I did everything right and my limit were [sic] cut' is true," she said.

FICO said 9 million card holders, or 27% of the group it examined closely, had negative information like late payments in their histories. That information might have triggered their cuts, FICO said. Late payments are considered a sign that the individual is a higher credit risk.

The average credit limit reduction from October through April was $5,100, more than double the cut for comparable consumers six months earlier, FICO said.

That total represented about 14% of the average total revolving credit for the group hit with cuts, the study said. The credit reports for these consumers typically showed very low account balances and low "credit utilization" ratios — the amount of available credit that the card holders actually used. They also had few, if any, reports of missed payments and long credit histories, FICO said. These elements all play big roles in determining an individual's credit score.