Why Your Credit Line Could Be Shrinking Despite Having Good Credit
One of the greatest ironies in the current economic climate is that credit card companies are making efforts to limit further potential losses by lowering the personal lines of credit available to their most reliable and responsible account holders. Even though these account holders have paid their balances in full each month; have used their lines of credit responsibly; have excellent credit reports; and are apparently in no danger of sullying their credit ratings by defaulting on balances, the companies that issue credit cards have drastically cut their lines of available credit to reduce the possibility of additional losses.
No matter how predatory the lending practices or exorbitant the rates of credit card companies, they have concrete reasons for taking these measures. According to Moody's Investor Service, credit card charge-offs, or uncollectable delinquent loans being written off the books, rose 48% this past August. In August 2007, the charge-off rate was 4.61%. In August 2008, that number climbed to 6.13%. Moody's reports that this rate is expected to climb further and forecasts peak incidence in the fourth quarter of 2009.
Credit companies might have good reason to act as they do; however, they're also largely responsible for creating their own problems. These companies have made it easy to apply for a credit card by relaxing lending standards and by relying less on credit ratings to decide who's worthy of a credit line. They've specifically targeted people who have spotty credit ratings. Those consumers are the most likely to carry a balance from month to month and, therefore,
to pay much more money over time to the company. Essentially, credit card companies have given borrowers with poor credit ratings and limited means the opportunity to go deep into debt. Huge balances at staggering interest rates can completely ruin a consumer's credit.
Not so long ago, anyone who wanted a personal line of credit with a credit card company or a lending institution had to have a very clean credit rating. Each consumer's credit report was scrutinized carefully for any indication that he or she might misuse credit lines and shirk debt obligations. In their hurry to make as much money as possible, credit card companies, mortgage lenders, and once-conservative lenders of all kinds relaxed their standards for lines of credit. That lax attitude during the first part of this decade has had a significant impact on the U.S. economy and the economies of countries around the world.
In order for the economy to improve, banks and other lenders need to get back to paying more attention to an individual's or business's credit report. Lenders should only issue lines of credit based on individual credit ratings, rather than operating from the motive of profit potential. Eventually, the people who use credit responsibly will once again see their lines of credit raised according to their ability to pay funds back in a timely manner. Then we'll be able to start rebuilding the foundation of our economy. That foundation is built on trust. Undoubtedly, how we maintain our credit ratings. now and in the future, will have a direct impact on the speed at which the economy can recover.