Credit Limits Cut for About a Third of Consumers

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 hurt 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 percent in the following six months, as the economy faltered and banks looked for ways to cut risk.

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.

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.

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