Credit card complaints have continued their steady decline since the implementation of the CARD Act. Now that credit card companies can no longer raise rates on existing balances, the main complaints continue to revolve around credit limit cuts. However, even though these complaints have fallen off in recent month, it appears that Baby Boomers are increasing the recipients of these cuts.
A recent visitor to Smart Balance Transfers provided some quality insights into the rationale behind credit limit cuts and why this frustrating risk management tactic may become less common in general, but more prevalent for baby boomers. In late August, Will wrote in expressing anger over the fact that the credit limits on his five Chase credit cards were reduced from $84,000 to $31,000. Will wasn’t angry because he was planning to charge a Lexus Rx350. He was angry because his credit utilization ratio skyrocketed from 30% to 90% and this was likely to have a massive impact on his credit score (and it probably did, as credit utilization ratio’s account for 30% of the credit score formula).
Will was also angry because he had been a customer for 20 years and felt slighted by a bank he thought he had a good relationship with. This sentiment has been shared with me by many people who experience credit limit cuts. A lot of people are more angry about perceived slights by credit card companies they have long standing relationships with than they are about the loss of available credit. But this is a whole different issue.
Angered, Will contacted customer service and, quite refreshingly, spoke with a representative that was was open about the process. The rep explained to Will that his credit limit cut was done to mitigate the risk of dwindling incomes due to “unemployment and retirement.” Here, a key issue is revealed. Many people who have written in to share stories of credit limit cuts are baby boomers. And, given the expectation that their incomes will decrease in retirement, it is now apparent that bank’s are cutting credit limits on baby boomers to mitigate risk.
The one bright spot pointed out by Will is the reality of financial markets. Credit card companies can only cut credit limits so far before they run the risk of hurting themselves. How? Because bank credit card portfolios, like individual credit scores, are hurt by high credit utilization ratios and low credit scores. Thus, there may be a limit to how much deeper credit limit cuts will go, as banks don’t want to appear to be lending to maxed out users with low credit scores. This would result in the market punishing them for having a poor quality credit card portfolio
Unfortunately, this won’t help all of the millions of baby boomers whose age may make them a target for credit limit cuts. Nevertheless, it may be a sign that the biggest credit card complaint thus far in 2010 may become less of an issue in the near future. Unless you happen to have been born at the wrong time.