New report explores the impact of credit card line decreases on consumers
When credit risk is on the rise, such as during an economic downturn, credit card companies may look at reducing consumers’ available credit limits to prevent against losses. Credit card line decreases are an industry practice where a company cuts a consumer’s credit limit on an existing account. A consumer’s available credit can disappear, sometimes without warning or subsequent explanation.
A new CFPB report describes how credit card companies increasingly used credit line decreases during both the Great Recession and at the start of the COVID-19 pandemic. Due to the critical role credit plays in financial resiliency, especially during a downturn, we sought to examine the importance and impact of these decisions by credit card companies.
The impact of limiting available credit lines
The following highlights our key findings:
Majority of decreased credit lines were not linked to recent credit card delinquencies
Credit line decrease actions were four times as common if a consumer had a recent credit card delinquency. However, approximately 67 percent of consumers who experienced declines in their credit line showed no evidence of a recent credit card delinquency.
For these consumers, the decision may be driven by other changes in their credit profile, internal account performance data, or by changes in institution risk management unrelated to their credit standing. Credit reports don’t currently indicate whether the action was driven by the consumer’s risk or the lender’s internal decision-making.
Credit line decreases led to dramatic reductions in available credit
Our research showed that line decreases resulted in a dramatic reduction in credit available on a consumer’s impacted credit card. For consumers across different credit score tiers, the median amount of credit decreased by approximately 75 percent. Median available credit was often reduced to less than $400 for all consumers except those with superprime credit scores (generally a superprime score is 720 or greater compared to deep subprime of 579 or less).
We also showed that a credit line decrease on a consumer’s highest balance card significantly affects a consumer’s total access to credit card lines. The impact of a line decrease may be more acutely felt for consumers in lower score ranges who are less likely to have as many cards as their prime counterparts and may find it more challenging to access new credit.
Rates of credit utilization went up
The credit utilization rate – or the amount of credit used against the available credit limit – also significantly increased, with most consumers essentially “maxing out” the card.
When their available credit decreased, median deep subprime, subprime, near-prime, and prime consumers reached 94 percent of their available credit. Even for super-prime consumers, their utilization rate more than doubled from 37 percent to 78 percent. We also showed that total combined utilization also increased after a credit line decrease for all but deep subprime scored consumers. This can have an impact on their credit scores – when utilization goes up, consumer credit scores tend to go down.
Credit line decreases tend to coincide with decreasing credit scores
Credit scores declined around the time of a line decrease, and this was felt by consumers of different credit scores. The decline, however, was significantly greater if a consumer had a recent credit card delinquency. During the analysis period, median credit scores for consumers with a recent card delinquency on any card decreased between 33 and 87 points. For consumers without a recent card delinquency on any card, median scores decreased between 1 and 12 points.
Credit balances remained depressed for subprime borrowers
While prime consumers may have used other credit cards or new accounts to offset the line decrease and return to previous total card balance levels, subprime and deep subprime balances remained depressed three quarters later, meaning that subprime borrowers are likely less able to return to previous card use.
This research is part of a series looking at consumer credit trends using a longitudinal sample of approximately five million de-identified credit records maintained by one of the three nationwide consumer reporting agencies.
Read the report, Credit Card Line Decreases .