Credit Card Companies Slashing Benefits

Credit card issuers aren't doling out revolving credit accounts the way they used to. In fact, they're reigning in availability, and leaving some of their customers without the credit they thought they had.

Horror movie character Freddy Krueger gained a cult following for slashing hapless teenage victims in their sleep. As this Halloween season winds down, credit card issuers are doing their fair share of slashing, too. Unfortunately, it's not the type of action that's going to earn them any fans.

From niche to mainstream

The credit crisis is hitting home for many households, and it's not pulling any punches. What began as a problem in a niche segment of the mortgage industry has spiraled into the mainstream, causing consumers to lose something they rely on daily-credit card availability.

In the U.S., credit cards have become the new checkbook. Cash-poor, rewards-hungry consumers whip out the plastic for coffee at Starbucks, gas at Shell, and fries at McDonald's. Some are even using revolving credit to make their monthly mortgage payments. But all that may change if lenders continue their panicked efforts to reduce their exposure to risk.

Cardholders get a shorter leash

To keep risk manageable, banks are tightening up credit card lending standards. And they're applying these more restrictive terms both to new and existing customers. Those pursuing a new credit card account may be surprised at the outcome of their application: they're more likely to receive a stingy credit limit, or even an outright rejection.

The circumstances may be more troubling, however, for existing cardholders. The banks are conducting account reviews based on their new standards, and they're not shy about making drastic changes. Some issuers are ratcheting down credit limits to just above the outstanding balance; this puts cardholders at risk of exceeding their limits and getting hit with fees. Those who have low balances or inactive accounts are also reporting slashed credit limits or account cancellations.

Reading the coffee grounds

These changes aren't limited to folks who don't pay their bills on time or have bad credit; they're also affecting good credit borrowers who have no reported problems whatsoever. Banks argue that they're just taking proactive precautions, reducing their exposure to certain high-risk characteristics. These might include where the cardholder lives, what type of mortgage he has, in what industry he works, and significant changes in account activity, among other criteria. The bank may start feeling nervous, for example, if a consumer suddenly begins buying groceries and paying utility bills on the account. Ditto if cash advances start to pile up. Cardholders who work in certain hard-hit industries, such as financial services or residential construction, may also be candidates for limit reductions.

Few defenses available

In A Nightmare on Elm Street, teens could avoid Freddy's wrath simply by staying awake. Unfortunately, that strategy won't work for cardholders. All they can do is cross their fingers and lay low by keeping debt payments current, and avoiding major spending changes.