Banks to clamp down on credit card holders

The credit crunch is closing in on credit cards. Banks that got burned on bad mortgages are now bracing themselves for billions more in bad debt on credit cards -- so they're trying to cut their losses by cutting off customers.

Big-name credit card issuers, including Bank of America, Chase and American Express, are shrinking -- not raising -- some credit limits.

And some, including Chase, are closing some accounts.

American Express will notify its card members in the coming weeks that it will initiate a broad-based interest rate hike -- not a cut.

Rates on American Express cards are expected to go up by 2 percentage points to 3 percentage points.

Last week, the Federal Reserve cut its benchmark interest rate by half a percentage point to 1 percent, matching a half-century low, to try to stop a deep, ugly recession.

Lower rates, of course, will help many borrowers. But consumers aren't guaranteed to benefit, especially when it comes to credit cards. And yes, this is going on as federal bailout programs are under way to try to get banks to lend more money.

The average rate on a variable-rate credit card fell to 11.37 percent last week from 13.64 percent for the same time a year ago, according to Bankrate.com.

But many consumers or people who run their own small businesses could be paying far higher rates -- or finding that credit is harder to get -- now that banks are trying to limit their own losses in the recession.

"Banks don't want to lend to each other -- and they certainly don't want to lend to more risky Main Street businesses, as well," said Mike Krushena, senior portfolio manager for Munder Capital Management in Birmingham.

If they do lend, they don't always want to charge bargain-basement rates.

One Bloomfield Township, Mich., couple said they were told that their Chase credit card -- which had a $12,000 limit -- would be closed by the bank in November unless the card is used prior to a given date.

The couple has other credit cards that they pay off each month, including several with retailers, and they hardly use this one card.

They said their current credit rating is in the high 700s -- which should mean that they're considered creditworthy consumers.

Lenders are running scared, so even consumers who would have been considered good customers in the past are caught up in the crunch.

"They're worried they've got too much exposure," said Gerri Detweiler, credit adviser for Credit.com in San Francisco. "It's a risk analysis."

If a $12,000 open line of credit is sitting around, for example, a bank still faces the risk that maybe somebody loses a job and then the couple pulls out that extra, once-unused credit card to maintain their lifestyle. If a job isn't found, the bills could add up and the couple could default.

So even if they charge something now to show that it's being used, the bank could still decide to reduce the credit line or raise the rate.

Many more borrowers are already behind on credit card payments and defaulting on credit card loans. Credit card delinquencies -- defined as a late payment that is 30 days or more overdue -- hit 4.54 percent during the second quarter of 2008, the latest data available from the American Bankers Association.

That's considerably higher than the 3.93 percent rate in the second quarter of 2001 -- during the beginning months of the last official recession.

For the first six months of 2008, the total amount of net charge-offs of credit card loans on the balance sheets of insured commercial banks and savings institutions was $10.3 billion, according to the Federal Deposit Insurance Corp.

Net charge-offs include recoveries on charged-off credit cards.

To try to limit their losses, more banks are aggressively reviewing their practices and credit card accounts. Consumers may be shocked to discover that their credit card limits can be suddenly cut in half in some cases.

Typically, banks would notify you by mail of a lower credit limit. But you're going to need to review your mail -- and your monthly statements -- to find such notices.

Linda Sherry, a spokeswoman for Consumer Action in Washington, said some credit card issuers are lowering credit limits as consumers pay off balances.

Say the consumer has $3,000 in debt on a credit card but pays off $1,000 on the card. It is possible that the credit card issuer could set a new limit at $2,000.

"In the end, they're trying to push certain people out the door," Sherry said.