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Some Credit Card Users Get Surprise Rejection At Register

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By ERIC DASH

The New York Times

Published: June 21, 2008

Updated: 06/21/2008 12:12 am

The easy money that led Americans to depend on credit cards to pay their bills is starting to dry up.

After fostering the explosive growth of consumer debt in recent years, financial companies are reducing the credit limits on cards held by millions of Americans, often without warning.

Banks that issue cards such as Visa and MasterCard, as well as the American Express Co., are cutting the limits for customers who have run up big debts, live in areas that have been hit hard by the housing crisis or work for themselves in troubled industries.

The reductions come as consumers, squeezed by a slack economy, a weak housing market and rising unemployment, are falling behind on monthly credit card payments in growing numbers. Credit card lenders are also culling their accounts ahead of new rules that are intended to benefit consumers but could limit the profits on customers deemed bigger risks.

Many Americans have come to rely on credit cards to cover everyday expenses like groceries, gasoline and medical bills, in addition to big-ticket items and luxuries.

While consumer spending, the nation's economic engine, has been surprisingly resilient of late, a more sweeping reduction in credit card limits could pose serious challenges for hard-pressed consumers and, in turn, the broader economy.

Many are already feeling pinched. Pamela Pfitzer, a family therapist with a stable six-figure income, was stunned when she went to a garden center near her home outside Sacramento, Calif., in early April and tried to buy about $30 worth of flowers with her American Express card. Her transaction was denied, she says, even though she insists she had rarely missed a payment and had just made one for $1,000.

After inadvertently hitting her credit limit a few months ago and then falling behind on a mortgage payment, Pfitzer said American Express lowered her limit to $900 from $2,300. The flowers pushed her over the new cap.

Then last month it happened again, she says, when she tried to buy office furniture with her Wells Fargo Visa card. Although she had just made a payment of about $700, Pfitzer found out that her credit limit had been lowered to $2,000 from $2,800.

"In all the years I have had credit cards, I have never had this happen before," Pfitzer said. "Now it has happened twice in the last few months."

They Often Act, Then Tell

Banks and mortgage companies are required by law to notify customers within three days of changing the limits on a home equity line of credit, and many have been aggressively lowering them. But credit card lenders have 30 days to notify their customers, and often do so only after taking action.

Such moves can cause a consumer's credit score to drop, forcing the person to pay higher interest rates and making it harder to obtain new loans.

Even so, disclaimers in the fine print of credit card applications typically stipulate that the issuer can cancel or alter credit limits at any time, regardless of a customer's payment or credit history.

Washington Mutual cut back the total credit lines available to its cardholders by nearly 10 percent in the first quarter of the year, according to an analysis of bank regulatory data. HSBC Holdings, Target and Wells Fargo each trimmed their credit card lines by about 3 percent.

Among those four lenders, that amounts to a reduction of about $15 billion in three months. Overall, the amount of available credit for the industry appears to be about flat, with the three biggest issuers - Bank of America, JPMorgan Chase and Citigroup - slightly increasing their overall credit lines. But even they are trying to rein in risky individual accounts.

Banks Brace For Losses

Big banks face intense pressure on their balance sheets as they bring on billions of dollars worth of complex mortgage-related investments and other loans they are struggling to sell.

Meanwhile, they are bracing for a surge in credit card losses as the job market and economy falter.

Consumers are reaching deeper into their pockets to pay for groceries and gas. Last year, as many as half of all those who took out home equity loans used the money to help pay down their credit card debt, according to J.D. Power research.

But home equity is no longer an easy source of financing. Month after month, cardholders keep falling behind on their bills.
American Express is reducing credit lines for customers holding subprime mortgages. And Chase Card Services, the consumer arm of JPMorgan, is taking similar action on distressed borrowers, especially in places such as California, Arizona and Florida, where home prices have declined sharply.

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