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.

Hillebrand said one group that was hurt by limit cuts but has gotten little attention was small business owners who used their personal cards to fund their companies. In some cases, the cuts created cash-flow problems, she said.

About one-third of the group FICO took a close look at, or 8.5 million people, saw their credit scores drop after their limits were cut, typically less than 20 points, FICO said.

The cuts had "negligible impact" on the scores of about 3.5 million people, and 12 million consumers saw score increases.

Credit scores are used by banks and other lenders as part of their formulas for determining if a borrower is a good risk. Higher scores are usually considered to indicate lower risk. That translates into consumers with higher scores typically being able to get lower interest loans and credit cards, making it cost less for them to borrow money.

Hillebrand said the results show the importance of managing credit carefully, including regularly using cards to keep them active and keeping a close eye on balances. "The only way to protect yourself in this environment is to keep your balances as low as you can," she said.

The study was released on the day when new credit card regulations signed by President Obama in May start taking effect.

The new rules at first require banks to notify consumers if they are changing credit limits, interest rates or other significant parts of a credit agreement 45 days before the changes take place. They must also give customers the chance to close accounts if they don't want to accept interest rate hikes, and pay off balances at the lower rates.

Banks must also now give customers 21 days to make payments after statements go out, up from the prior 14.

In February, broader regulations will kick in, covering issues ranging from how payments are applied to how card companies can market cards to college students.

Copyright 2009 The Associated Press.  All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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