topic Re: Credit Line Slashing in Credit Cards

Credit Line Slashing

KatrinaE — Wed, 01 May 2019 16:50:42 GMT

I have seen a lot of posts were credit lines are being slashed for various reasons. Some using their cards and carrying a balance, some for not using their cards and not carrying a balance. I saw a post about "bust-out" behavior etc. What is behind all the credit line slashing? Is there any particular trend to it, industry reason, ways to avoid it etc?

Re: Credit Line Slashing

Anonymous — Wed, 01 May 2019 16:59:22 GMT

It’s all about risk. Lenders monitor your behavior on your accounts with them and with other lenders. They watch for trends and behaviors that may give them reason to think you are becoming an elevated risk, and adjust their exposure accordingly. This could be carrying excessively high balances for long periods without making much progress in lowering them, sudden unprecedented high usage of available lines, derogs hitting your reports from other creditors, etc.

With the recent cuts AmEx has been making, much of it here at least has been for people with high limits who barely use the cards. It makes little sense to extend $30k to someone who charges $150/month. Banks must hold a percentage of the limits they’ve extended in liquid cash, and pulling those limits back allows them to reallocate funds to other cardholders who use the credit they’re given.

Re: Credit Line Slashing

KatrinaE — Wed, 01 May 2019 17:23:16 GMT

I understand the risk aspect of it. I appreciate you shareing the percentage of cash vs credit extended aspect - I think that was more what I was looking for. More of their back end processes - when/how often do they review? Do they have alerts like we have alerts on our credit score/file changes? Is there an industry trend right now (money tightening)? If so, is this tied to politics/election fears etc...

(Pls know I am not trying to turn this into a political debate. I am not seeking a red/blue discussion - just trying to get that crystal ball up and running )

Re: Credit Line Slashing

Anonymous — Wed, 01 May 2019 18:53:33 GMT

No telling when or how often a lender reviews your file but I imagine the answer is all over the place and very lender-specific. If you look at reports from www.annualcreditreport.com you can see soft pulls recorded by source and date. Some lenders go crazy, pulling every other day. I don’t think that’s normal - chances are that’s a periodic review or a reaction to something in the client’s profile that has arisen.

I would think that they would have some sort of basic alert system that at least pings them in the event of a CLD or late payment or chargeoff from another lender but probably not for simple score changes as they’re in flux constantly.

As for a general tightening of the belt, it would not surprise me - the financial industry has a boatload of fingers on all sorts of national pulses.

Re: Credit Line Slashing

Anonymous — Wed, 01 May 2019 17:56:25 GMT

Economic factors play a part. The rising debt load, stagnant wage growth, an increase in defults, all that fun stuff.

Re: Credit Line Slashing

CreditInspired — Wed, 01 May 2019 23:35:05 GMT

@Anonymous wrote:
It’s all about risk. Lenders monitor your behavior on your accounts with them and with other lenders. They watch for trends and behaviors that may give them reason to think you are becoming an elevated risk, and adjust their exposure accordingly. This could be carrying excessively high balances for long periods without making much progress in lowering them, sudden unprecedented high usage of available lines, derogs hitting your reports from other creditors, etc.

With the recent cuts AmEx has been making, much of it here at least has been for people with high limits who barely use the cards. It makes little sense to extend $30k to someone who charges $150/month. Banks must hold a percentage of the limits they’ve extended in liquid cash, and pulling those limits back allows them to reallocate funds to other cardholders who use the credit they’re given.

Hi @Anonymous. I thought banks had to hold the entire amount of the credit limit extended, not just a percentage of it. Am I wrong?

Re: Credit Line Slashing

mikesonthemend — Wed, 01 May 2019 23:49:49 GMT

We are in the midst of one of the longest economic expansions on record. While modest at first, the last few years have looked and sounded like we are "late in the cycle." Even with all of the low interest rates, the amount of debt that has been issued since 2009 is staggering.

A review of Discofer Financial Services and Capital One's latest earning reports will illuminate this concern. Both lenders discussed tightening lending standards and lowering exposure.

Furthermore, there are rumblings about FICO score inflation lessening the quality of borrowers when compared to 2008 standards.

Having experienced 5 decent recessions in my adult life, 2 of which were accompanied by asset bubbles being bursted, I can't say I blame the lenders.

Re: Credit Line Slashing

gdale6 — Thu, 02 May 2019 00:11:20 GMT

@CreditInspired wrote:
@Anonymous wrote:
It’s all about risk. Lenders monitor your behavior on your accounts with them and with other lenders. They watch for trends and behaviors that may give them reason to think you are becoming an elevated risk, and adjust their exposure accordingly. This could be carrying excessively high balances for long periods without making much progress in lowering them, sudden unprecedented high usage of available lines, derogs hitting your reports from other creditors, etc.

With the recent cuts AmEx has been making, much of it here at least has been for people with high limits who barely use the cards. It makes little sense to extend $30k to someone who charges $150/month. Banks must hold a percentage of the limits they’ve extended in liquid cash, and pulling those limits back allows them to reallocate funds to other cardholders who use the credit they’re given.
Hi @Anonymous. I thought banks had to hold the entire amount of the credit limit extended, not just a percentage of it. Am I wrong?

https://www.investopedia.com/terms/r/requiredreserves.asp

Re: Credit Line Slashing

frugal47374 — Thu, 02 May 2019 00:23:38 GMT

@gdale6 wrote:
@CreditInspired wrote:
@Anonymous wrote:
It’s all about risk. Lenders monitor your behavior on your accounts with them and with other lenders. They watch for trends and behaviors that may give them reason to think you are becoming an elevated risk, and adjust their exposure accordingly. This could be carrying excessively high balances for long periods without making much progress in lowering them, sudden unprecedented high usage of available lines, derogs hitting your reports from other creditors, etc.

With the recent cuts AmEx has been making, much of it here at least has been for people with high limits who barely use the cards. It makes little sense to extend $30k to someone who charges $150/month. Banks must hold a percentage of the limits they’ve extended in liquid cash, and pulling those limits back allows them to reallocate funds to other cardholders who use the credit they’re given.
Hi @Anonymous. I thought banks had to hold the entire amount of the credit limit extended, not just a percentage of it. Am I wrong?
https://www.investopedia.com/terms/r/requiredreserves.asp

From the article: "Reserve requirements are the amount of cash that banks must have, in their vaults or at the closest Federal Reserve bank, in line with deposits made by their customers. "

That article doesn't mention credit cards. And credit card limits aren't deposits. So do reserve requirements apply to credit card limits?

Re: Credit Line Slashing

mikesonthemend — Thu, 02 May 2019 00:40:16 GMT

I believe our fractal banking system works on an 8 to 1 ratio. As in, for every dollar on deposit, a bank can loan out 8 dollars provided they are abiding by the Federal Reserve's regulations on credit worthiness, etc... This is actually how new money is created. New notes are printed, Money is created out of thin air, well economic demand.

Non performing loans count against this and require banks to hold extra reserves for credit defaults. All information regarding loan loss reserves is public an updated every 90 days.

Re: Credit Line Slashing

Anonymous — Thu, 02 May 2019 01:49:18 GMT

@KatrinaE wrote:
I have seen a lot of posts were credit lines are being slashed for various reasons.

While there are definitely many different reasons that AA is taken against credit lines, the #1 reason by leaps and bounds is due to the introduction of negative information (late payments being the most common) to a credit report. I would say that in 99% of cases this is the culprit. Sometimes this may be accompanied by other things like prolonged high utilization, but almost every time the catalyst is a negative item being introduced.

There are of course a ton of other reasons completely unrelated such as card non-use or minimal use, an abnormally large charge being made, etc. but those things are exceptions and far less common than the #1 reason I gave above.

Re: Credit Line Slashing

Gollum — Thu, 02 May 2019 02:39:10 GMT

@Anonymous wrote:
Economic factors play a part. The rising debt load, stagnant wage growth, an increase in defults, all that fun stuff.

OpenG,

Wage growth (or the lack thereof) is an intensely personal concern, but it is easy to find out how wages in the overall U.S. economy are doing:

just google for "wage growth"

Disregarding Google's "featured snippet" (https://support.google.com/webmasters/answer/6229325?hl=en) at the top of the resulting webpage because epi.org (Economic Policy Institute) is, according to Wikipedia, "...usually described as presenting a liberal viewpoint on public policy..." (https://en.wikipedia.org/wiki/Economic_Policy_Institute):

The first hit (https://www.frbatlanta.org/chcs/wage-growth-tracker.aspx) shows the three month moving average of median wage growth since 2010 has been approximately between 1.8% and 3.4%.

The second hit has the title "At a 10-year high, wage growth for American workers likely to keep accelerating" and is dated March 8, 2019 (https://www.marketwatch.com/story/at-a-10-year-high-wage-growth-for-american-workers-likely-to-keep-accelerating-2019-03-08).

So even though some individuals undoubtedly feel as though their own wage growth is stagnant, wage growth for the overall U.S. economy does not seem to be stagnant.

Edit: The inflation rate should also be considered along with wage growth or lack thereof. "The current inflation rate for the United States is 1.9% for the 12 months ended March 2019, as published on April 10, 2019 by the U.S. Labor Department." (https://www.usinflationcalculator.com/inflation/current-inflation-rates/ and there are links for different years and a calculator to compare different time periods)

Re: Credit Line Slashing

SouthJamaica — Thu, 02 May 2019 03:23:26 GMT

Credit card lenders need to have loan loss reserves. https://www.bloomberg.com/news/articles/2018-06-07/credit-card-issuers-beef-up-reserves-in-anticipation-of-losses

Re: Credit Line Slashing

frugal47374 — Thu, 02 May 2019 04:07:27 GMT

(If that is in reply to questions about what it costs banks to have customers with unused credit limits...)

Those reserves are for loans actually made, not for unused credit limits.

Re: Credit Line Slashing

SBR249 — Thu, 02 May 2019 06:50:46 GMT

While fractional reserve banking specifically refers to the practice of banks holding in reserve only a portion of what their customers have on deposit (deposit liability) while investing or lending out the rest, the concept should still be broadly similar and applicable to what a CC issuer does.

It would be impractical and inefficient for a lender to have 1:1 parity between the CLs that it issues and the liquidity it keeps on hand to service those CLs because it is a fact that not everyone uses 100% of their CLs all the time. What lenders strive to achieve is a dynamic equilibrium between incoming repayments of balances and outgoing payments to merchants with a margin of profit. In that sense, if everyone paid their debt on time, a lender would theoretically only need minimal bridge funds to keep the ball rolling between transaction date and payment date. However, since defaults, late payments, not PIF, etc. are things that people do, lenders usually will take into account the expected total balances payable (based on historical data) and the expected default/non-payment/delayed payment rate and keep a certain level of reserves to cover those exigencies with a buffering margin.

Re: Credit Line Slashing

SouthJamaica — Thu, 02 May 2019 11:16:54 GMT

@frugal47374 wrote:
(If that is in reply to questions about what it costs banks to have customers with unused credit limits...)

Those reserves are for loans actually made, not for unused credit limits.

The increase or decrease of a credit limit is in itself an accounting event which connotes increased or decreased credit risk. https://www.pwc.com/gx/en/audit-services/ifrs/publications/ifrs-9/revolving-credit-facilities-and-expected-credit%20losses.pdf

Re: Credit Line Slashing

Lucifer — Thu, 02 May 2019 12:24:56 GMT

@KatrinaE wrote:
I have seen a lot of posts were credit lines are being slashed for various reasons. Some using their cards and carrying a balance, some for not using their cards and not carrying a balance. I saw a post about "bust-out" behavior etc. What is behind all the credit line slashing? Is there any particular trend to it, industry reason, ways to avoid it etc?

In my own experience over the years and on various chat boards - this has been going on forever. Once happened to me as well.

BOA balances chased me in one fell swoop from 10k to 1k. Chase, citi - they got me too - chase closed me down. Now mind you, I neever defaulted with them - not even a 30 day late. BUT - I did have a dentist put a judgement on me for $80 and this happened around 08 when the ecomomy had some issues and I did have some balances.

It is what is it - none of those banks knew me or what was going on with me - they just all have their algorythms and stock holders. I allowed my actions to match those that are risky and I was treated as such. It'e been happeneding and will happen. Plan accordingly.

It is also why I refer to Credit Lines as confidence points.

Re: Credit Line Slashing

Anonymous — Fri, 03 May 2019 02:03:38 GMT

@Lucifer wrote:
BOA balances chased me in one fell swoop from 10k to 1k. Chase, citi - they got me too - chase closed me down. Now mind you, I neever defaulted with them - not even a 30 day late. BUT - I did have a dentist put a judgement on me for $80 and this happened around 08 when the ecomomy had some issues and I did have some balances.

See, the catalyst here was the introduction of a negative piece of information. I swear, 99 times out of 100 this is the reason.

Re: Credit Line Slashing

Revelate — Fri, 03 May 2019 03:45:19 GMT

BBS: there are also plenty of people who get a late or other thing tacked on and nothing happens. I know personal anecdotes aren’t worth much but no lender has blinked in the course of my credit history for all the stupid things that have happened to my credit.

I’m not sure your 99% is really reality honestly as it is more than a single factor that is being looked at.

Re: Credit Line Slashing

Anonymous — Fri, 03 May 2019 04:11:06 GMT

We have seen plenty of times that Synchrony, Comenity, Chase, Amex, and Barclays have balance chased or CLD due to not late payments anywhere but due to high utilization of one or more cards, with them or another issuer.

I definitely wouldn’t say that 99% of it is from negative information on the credit report. Some issuers really don’t like seeing high utilization or even moderate utilization with minimum payments which is really annoying because it defeats the purpose of having a 0% intro offer if your other cards are going to sock it to you for using it.