I put this up originally in a slightly different way at Debtorboards: http://www.debtorboards.com/index.php/topic,7867.msg56106.html#msg56106 .
*****************************************************
If you think it’s bad that a creditor would cut the line to just above what you owe? This story posted on “Smart Money.com” by reporter Kelli B.Grant last Wednesday–“How to Blow Your Credit Limit — Without Spending”–shows it CAN get worse:
Under different circumstances, David Chaplin-Loebell wouldn’t have minded that American Express … cut his unlimited credit line to just $5,000…when AmEx reduced his line in October, he had an outstanding balance of $10,000. “I found out by having a business purchase declined,” …Chaplin-Loebell, who lives in Philadelphia, is now paying the balance under his regular card terms, and presumes the line will free up for new purchases once he’s below the limit. “For now, they’ve essentially frozen the account,” …
Paul Pensabene of Saratoga Springs, N.Y., received a statement from HSBC on Dec. 8 that said he had a $359.99 balance and remaining available credit of $8,640. But when he went online to pay the bill several days later, his online account showed that same balance put him over his newly-reduced credit line of $300. And that didn’t include the $35 over-limit fee. Pensabene grappled with customer service until they agreed to remove the fee, and then paid the balance in full. …
Like, let’s say, instant contract default. Even if one never went over the credit limit and/or was ever even late with a payment. And, yes, it’s as legal for the credit card companies to do this as to cut the line to just above what is owed:
[T]he practice of cutting credit lines below the balance is legal … says Chi Chi Wu, a staff attorney for the National Consumer Law Center, a consumer advocacy group. Federal Reserve rules requiring lenders to give cardholders 45 days notice before reducing a credit line to the point that it would trigger penalties won’t go into effect until July 2010. “[Until] then, there are no federal protections,”
Why would they do this?
One possibility is that this is yet another attempt by card issuers to get consumers to close their accounts (while bringing in a little fee income in the short term), says Dennis Moroney, research director and senior analyst for consulting firm Tower Group. “I can’t rationalize in my mind what other motivation there would be,”
The rationalization? Risk avoidance and narrowing the target market.
This is still another incentive for consumers to give up and close the account but allow the credit card company to rake in still.more.fees while doing it. But instead of coming right out and telling the consumer “We are cancelling your account”, which they can well do by contract, they are trying to back out. A little at a time.
Why do it this way rather than just go ahead and close accounts? Well, it seems that credit card companies are WAY oversubscribed relative to the economy and the carrying capacity of the companies.
If they were to just shut down the accounts they no longer want? It would not only be the public relations nightmare they are getting anyway, but it would scare the bejeezers out of their stockholders AND it may well get attention from Federal regulators they do not want.
Guess which risk they decided to take? Angry stockholders and pissed-off regulators are a lot more painful than some ticked-off consumers whose goodwill the credit issuers don’t want anyway.
If you were thinking just to pay off the account then sock-drawer it to try to keep the line open? Well, think again: Spokeswoman Cindy Savio of HSBC said:
“[I ]n an effort to reduce credit risk and refine strategies for our card business, we have tightened credit standards, reduced or canceled higher risk credit lines, and closed a number of inactive accounts,”
Use the account? We will screw you.
Don’t use the account? We will screw you.
Is it just me, or do I see a “Catch-22″?
————————————————————
Grant, Kelli B., “How to Blow Your Credit Limit–Without Spending”, SmartMoney.com, March 11, 2009. Downloaded March 15, 2009. Available from http://www.smartmoney.com/spending/deals/card-issuers-will-not-hesitate-to-slash-your-credit-line/ .
Lenders–Beware the Coming Storm (X-post from Debtorboards)
Tuesday, November 3rd, 2009This post by Flyingifr originally appeared at Debtorboards on November 3, 2009. It is a succinct commentary on the current credit crisis and how lenders are likely to discover that the “Law of Unintended Consequences” can hurt when it is applied to them and their business model.
The link to the original post: http://debtorboards.com/index.php/topic,8736.msg62516.html#msg62516
The post is used with the express permission of the author.
Flyingifr wrote:
Lenders – beware the coming storm
With the current recession and credit crisis, the news media is beginning to note a cosmic shift in people’s attitudes towards credit. No longer are credit cards being looked at as a universal necessity – they are once again being looked at as a luxury.
I am also seeing a shift in attitudes on both sides of the equasion. Loyalty is history. Lenders, who used to value long term relationships with their customers are now looking at their customers as cash cows and when the cow doesn’t give enough milk it is sent to the slaughterhouse to be turned into hamburger through rate jacking, credit line decreases or simple unannounced account closures.
I remember the days when bankers encouraged you to have a long term relationship with them. My Debit Card attached to my bank account still reads “customer since 1996″, but my credit cards no longer do. American Express still does that, but after a rate jacking and 4 credit line decreases in six months on an account that was never delinquent by one dollar or one day that account was closed within 14 months of its opening. Amex made no attempt to keep me as a customer and actually paid thousands of their customers to go away. The other credit card companies are in the same boat. Citibank made no attempt to salvage our relationship, neither did GEMB.
It is easy to ascribe this to the current credit crisis, and that is probably a correct assumption, but what is happening to the concept of “loyalty”? Loyalty is a component of trust, and the credit industry is built on trust. Lenders trust borrowers to repay and borrowers trust lenders to be honest with them and to honor their commitment to lend. Stories are legion of people at checkout counters across the land attempting to use a credit card that they thought had plenty of available credit only to find there is none after a quick and unannounced decrease in credit line. I am not talking about accounts that are delinquent in payment – I am talking about accounts that are current, have always been current and in many cases actually have no balance owed at all.
Lenders say “it’s a business decision” and they are correct. But that goes both ways, and this is where I am sure the collectors will argue with me. How many of us have heard collectors cajole us towards repayment based not on the “business decision to repay” but on the “moral” argument – you have a moral commitment to repay. It’s as if one side of the transaction is an amoral “business decision” when made by a lender and the other is a “moral imperative” when made by a consumer. “Yes, we raised your interest rate to 30% and cut your credit limit to $5 above your balance with no advance notice, tripled your payment, changed your due date and there is nothing you can do about it even though you have been a customer of ours for thirty years and have never made a late payment, but your payment is now five minutes late. Here’s your late charge and we dinged your credit.”
OK, so it may not actually be THAT draconian, but many people feel it’s pretty close to that, and many are angry. How angry? I see a storm coming that the lenders are powerless to stop and may end up hurting them big-time.
If credit is reduced to simply an amoral “business decision” what happens when BOTH sides of the transaction see it that way? The moral imperative to be honest goes out the window and only what is expedient and can be “gotten away with” will happen. Let’s discuss someone I know and we will call her Jenny. I personally know about dozen people who fit Jenny’s profile and the number is growing daily.
Jenny is in her late 50′s. She has a six-figure credit limit spread among a half a dozen credit cards. Her utilization is about 20% and makes her payments consistently above the minimum and on time. Her FICO’s are all in the mid 700′s. She has a six-figure household income, owns her home and has three paid for cars. Her children are all grown and she is preparing for her retirement. She has two pensions fully vested and a solid investment portfolio.
She has also had $75,000 in credit lines reduced in the past year and has had four credit cards closed unannounced. She feels she plays by one set of rules and the lenders play by another. She is right – she plays by the “moral imperative” set of rules and the the lenders are playing by the “business decision” set.
That is about to end.
Her plan: To retire at age 62 – as soon as she can collect her pensions and Social Security and move to the Philippines. She will sell her paid for home to her child before doing anything. By that time her investment portfolio will be in the low six-figure range, and her combined pensions and Social Security will allow her to live like royalty in the Philippines. Did I mention that she plans to hit all her credit cards up to the maximum before she leaves, and not pay them back? She won’t need them in the Philippines, she will have enough cash for whatever her heart desires. She doesn’t care what happens to her credit rating in the US, she will be in the Philippines. Or Brazil. Or Singapore. Or Korea. Or Mexico, Belize, Costa Rica or anywhere else in the world, even Nova Scotia. “It’s not personal, it’s business.”
Collectors will skip trace her, maybe they will find her, maybe they won’t. If they do, what can they do? Her pensions and Social Security will be Direct Deposited to a bank in the Philippines. Her assets will be in Treasury Bills. The Treasury will mail her a check every six months for the interest. None of which can be touched by bill collectors. Is she alone in making these plans? No, I know of a dozen like her and several who have already done this. The numbers will grow and with each one the lenders will get hit hard. In Jenny’s case for $100,000. The new morality is “it’s just business.”
Lenders – you created this environment. I hope you enjoy it.
Tags: bank fees, banks get theirs, business procedures, close the account incentives, contracts, credit cards, credit freeze, credit issuers, creditors' "WHAT??" moves, economic "meltdown", excessive fees, original creditors' tricks, policies and procedures, unintended consequences of greed
Posted in Commentary., Credit Issuance., Creditors, Flyingifr, bank rip-offs, credit line decrease tricks, creditors' acting badly, economic "meltdown" | Comments Off