I put this up originally in a slightly different way at Debtorboards: http://www.debtorboards.com/index.php/topic,7867.msg56106.html#msg56106 .
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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″?
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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/ .

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