Credit Line Slashing

[KatrinaE]

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?

[Anonymous]

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.

[KatrinaE]

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 )

[Anonymous]

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.

[Anonymous]

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

[CreditInspired]

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@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.

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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?

[mikesonthemend]

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.

[gdale6]

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@CreditInspired wrote:

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@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.

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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?

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

[frugal47374]

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@gdale6 wrote:

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@CreditInspired wrote:

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@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.

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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?

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

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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?

[mikesonthemend]

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.