Credit card issuers lower limits, raise rates

Think you have enough credit to make a modest purchase with your credit card? Think again.

Credit card issuers are closing inactive accounts and lowering credit limits, creating potentially embarrassing issues for consumers who overlooked the notice about the changes in the terms of their accounts. Federal law requires credit card issuers to notify cardholders at least 15 days before changing the terms of an account. But the notice is often buried in fine print or discarded by consumers who mistake the notices for junk mail.

Mintel Comperemedia, a service that provides direct marketing competitive intelligence, reports many credit card issuers are using direct mail to inform cardholders about big changes in account terms, conditions and fees. Banks began reducing credit limits and boosting interest rates for tens of thousands of consumers early last summer. According to the American Bankers Association, a Washington, DC-based trade group, they were looking for ways to reduce their exposure to cardholders more likely to default.

The practice has become increasingly widespread because of the worsening economic crisis. "With no clear end in sight for the recession and other economic troubles, many companies are altering the terms of their products and services so they can stay profitable, protect their assets and reduce their risks," said Stephen Clifford, VP of financial services for Mintel Comperemedia.

Lenders are approving fewer applications for new credit and changing terms of existing cards. They may lower a person’s credit limit because of a drop in a credit score, a late payment or a balance too close to the limit. Sometimes, they drop credit limits for no apparent reason at all. They may blame the decrease on the fact the cardholder was "only using a small portion of the available credit"

 They're also increasing rates and fees. Just recently, the Federal Reserve approved new rules that will prohibit credit card companies from raising interest rates on existing balances unless a payment is more than 30 days late. But those changes won't go into effect until July 2010.