New Credit Techniques to Judge Consumers

Credit card issuers are changing the rules as they go, leaving their customers and would-be customers stuck with insufficient available credit.

Imagine acing a job interview, only to find out that you're ineligible for hire because of your eye color. You'd probably feel confused, ripped off and angry-the same way credit cardholders feel when their lines are cut based on factors unrelated to credit score or payment history.

In this credit crunch, it isn't just mortgage lenders who are getting more conservative. Debt consolidation loans are harder to find, auto lenders are raising their standards, and-most surprising of all-credit card issuers are getting finicky. Since high limit cards have long been available to anyone with decent credit, the more conservative stance is catching existing and prospective cardholders off-guard. Despite customer complaints, some issuers aren't backing off their new message that good credit is no longer good enough.

Getting personal

Several major issuers, including Washington Mutual, Inc. and J.P. Morgan Chase & Co., are expecting noticeable increases in delinquencies and credit card losses this year. The pessimistic outlook has its roots in the sluggish economic environment and continued fallout from the subprime mortgage crisis; both factors which are expected to continue pinching consumer and business cash flow. Financial institutions are hoping to minimize future losses by tightening up credit standards and adding new layers of scrutiny.

While card issuers generally won't go on the record about their credit evaluation techniques, their customers are talking. Some of the factors being eyeballed are the customer's geographic location and line of work. The word on the street is that card issuers are specifically targeting areas hit hardest by the mortgage crisis, identifying residents of those areas as high-risk-even when they have solid payment histories and no significant changes to their credit scores. Credit lines are being slashed as a result.

Cardholders working in the financial services, housing, and construction industries are getting the same treatment. A reduced credit line can be particularly problematic for business owners who rely on their credit accounts to make daily transactions. Adjusting to lower levels of revolving credit may require the business to increase fixed-rate debt through debt consolidation or new term loans.

Critics of the new policies are suggesting that these measures may expedite credit losses for the issuers. If businesses or individuals are surprised by a sudden decrease in available credit, they may have to do some financial juggling to recover. If alternative credit sources don't become available, defaults could result.

Shopping around

Affected cardholders should shop around for new providers. Not all issuers have the same requirements, so cardholders with good credit should qualify for replacement accounts with the levels of credit they've enjoyed in the past. Thankfully, card issuers are not yet declining applications based on eye color.