Tightening Credit - Where Were the Economists?

A reader posted the following comment and since comments aren't very visible I thought I'd bring it into a post along with my reply. I have to wonder...if I was able to see this happening back in April 2008, why weren't all the economists and our elected officials able to forsee what was going on and the ramifications?
Loganet said...

Hi Mary,
Wow! You were one of the first to call out the rate increases in credit cards back in November? of 2008. Today, FrugalDad.com just posted how his rate was increased from 6% to 28%. He has good FICO and no late payments. The CC companies are just raising rates across the board.12/2/09 6:34 AM

Mary said...
Lognet, actually I began to post on a Forum (before I started this blog) about this back in April 2008:

Posted on: Sat, 04/19/2008 - 15:59 Mary said:
...I told him he needed to go to the bank today and draw the full amount (of their HELOC), just to be safe....They are leaving on Monday for 2 weeks vacation and when he gets back I assured him we’d figure out the best way to utilize his access to the money without it costing him too much in interest payments. Plus he needs to be below the $100,000 limit on the money market account for FDIC protection.

Posted on: Sun, 05/04/2008 - 13:02 Mary said:
An update…our friends got back from their vacation only to hear that an acquaintance who lives off of his HELOC found it closed on the very Monday after I got them to pull the money out of theirs. Not sure if it’s the same bank they use, but it’s very likely.

Lesson here is that you get no notice, except that the line of credit is no longer available to you.

Posted on: Tue, 05/06/2008 - 08:05 Mary said:
WaMu is one of the banks that is beginning to close HELOC accounts. They are in financial trouble because of all the questionable loans they wrote in the real estate heyday and they just closed all of their “home loan only” branches. They’re not in a position to take any risks on something they could just as easily close-out and not worry about.

Posted on: Thu, 06/19/2008 - 10:45 Mary said:
The credit card companies are starting to lower your credit line. The more open credit you have the more they may lower it. A friend's Amex line was $25,000 for over 7 years and they just lowered it to $8,000 - which is about what he had outstanding on it at the time. I just had a card that I've had since 1991 with a $25,000 credit line lowered by $1,240.00 - can you imagine? Again, that's about the open credit I had on it at the time. Absolutely nothing had changed in my credit report, my FICO hadn't changed (I get e-mailed every time there's any change to it) and I've never missed a payment in 17 years.

With college tuition for two kids coming up I just cash-advanced a card with a sizeable open credit line on it because I can't risk it not being available. There are always unforseen expenses - 21-year old daughter just had a trip to the emergency room that required an ambulance ride and tests and probably will top out at about $5,000 (my HSA will save us on this one) - our dog collapsed totally unexpectedly last February while we were 3,000 miles away and between the treatment to keep her alive until we could get home and then the surgery to give her a few more months with us cost about $10,000.

So now I've taken all available monies on my HELOC to protect my access, and now max'd out credit cards to make sure I don't lose access to that money. Hell of a pickle this economy is putting us in!

Posted on: Sun, 06/29/2008 - 10:53 Mary said:
First HELOC's, now Credit Card Limits are getting reduced! Watch your FICO scores DROP!

Well, now that people are getting their HELOC's rescinded (heard a horror story from my friend of a woman who was in the middle of a full kitchen remodel; totally torn down to studs then found her HELOC was yanked!)

Just saw an article on it and here's a quote - the bigger (??) issue is what all of this does to your credit score, so take heed:

"Here's how that happens: Let's say a cardholder has a credit limit of $10,000 and a balance on the card of $4,000. The card company worries that large balance may increase the prospects for default, so it lowers the credit line to $5,000.

But in doing that, it completely changes what is known as the credit utilization rate, raising it from 40 percent to 80 percent. That is then factored into the calculation of one's so-called FICO credit score, which measures creditworthiness, according to Craig Watts, a spokesman for FICO-creator Fair Isaac Corp. "

Here's the link to the full article:

And later that day:

Posted on: Sun, 06/29/2008 - 11:26 Mary said:
Forgot to mention…I found it interesting that one of the banks that are doing this is Washington Mutual, already known to be pulling HELOC’s. Also Wells Fargo, which was a surprise to me.

This situation is troubling on a number of levels. It seems like a fast-moving downward spiral that is going to have far, far reaching effects. e.g., I’m OK with holding my own right now, even holding non-cash flowing properties. But take away any of my credit and I could be in a very bad situation.

Again, in the current economy we’re not doing great, but we’re holding our own. But change anything in the current mix and we could be in a tight situation.

Anyone interested in adding to the discussion of where all of this may lead, head over to the “Crystal Ball” Forum topic!

BTW, another friend got her $100,000 HELOC “rescinded” by National City Mortgage last week. She’s sick about it, mainly because she knew I had suggested taking it all out in putting it in an interest bearing account, just in case, but she didn’t act. She had another smaller one that she immediately took and put away.

Posted on: Sat, 08/16/2008 - 16:08 Mary said:

Well, it's beginning...I just got a letter from a Platinum credit card that I've had since 1991 (I'm listed as a "charter member" on the front of it!) - they reduced my credit line, get this, by $1,240.00! Probably would have been more, but that's all I had available on the credit line. This is a card I've never paid late.

I use a service to tell me anytime my FICO score changes, but nothing has, and we have a good score.

Just like with HELOC's - if you NEED the credit line you may want to cash advance your credit card and tuck the money in an interest bearing account...that's what I'll be doing with another card I have with available credit on it. College tuition will be due in another month and they don't take credit cards anyway, so I'll just take it all now so I've got a buffer. What's next????

Posted on: Sat, 08/30/2008 - 11:53 Mary said:

That amount was just a little less than what I had available - I think they took what I hadn't used yet and allowed for next interest that would be assessed and knocked it down. But why bother to do that for such a small amount of additional credit? That's what is so unsettling - it appears to be an automated system. Computer program just churns out the numbers, reduces the line of credit and sends a letter. Bam! So if I had been unlucky enough (LOL) to have had $20,000 open credit I could have found my credit line reduced from $25,000 to $5,000. I would have been VERY unhappy.

And since no one is extending credit to anyone right now (so it seems, anyway) max'ing out all of my credit cards and HELOC is irrelevant to me if it dips my FICO score. Even with a really good one (FICO) people aren't getting mortgages, etc.

So even if I came into a big amount of money would I pay down anything? Probably not, because I'd be afraid my credit lines would start disappearing. Will that cost me money? Yes, but I'll retain peace of mind knowing I have the money available.

Posted on: Wed, 09/10/2008 - 21:30 Mary said:
In this economy you may want to consider a guaranteed return of principal investment. Rabo Bank is the largest (?) international bank and they have these types of CD's. Basically they give you a range of interest based on what they expect to make, but guarantee you'll always get your principal back. If you're willing to put some of your principal at risk they give you a higher rate of return in exchange you put 10% or 20% of your principal at risk.

I'm in a similar situation. I'd like to start paying some of my HELOC back, but I'm afraid if I do they will reduce the available LOC by what I pay back.

I've made all of my friends who may need their HELOC lines of credit take out the maximum and put it in an interest bearing account. At least until we see where the dust settles. If you may need the money you can't be sure you'll have access to it unless you take it now, is my opinion.

Posted on: Mon, 09/15/2008 - 18:19 Mary said:
I hate to say it, but for anyone who understands what's going on you need to be max'd out on your credit lines to preserve them if you need or want them. At least until all of this shakes out.

I've got to call Amex tonight. I have several thousand dollars in open credit on my card yet yesterday and tonight at the grocery store it was declined. I have a bad feeling about what I'm about to find out.

Posted on: Tue, 09/16/2008 - 10:33 Mary said:
So here's the update:

I went to the grocery store the other day and used my AMEX card as usual and it was declined. I download all of my credit card transactions into my Quicken account every day and I knew I had several thousand dollars of available credit on that card. Thinking it was a fluke I used a different card. Last night (yes I go to the grocery store pretty much every day!) it happened again.

Just now I called AMEX to see what the problem was and found that they had reduced my credit line down to what I had outstanding. Poof, thousands of credit line dollars, gone. Being my argumentative self I contested it with the young man who claimed it was because of a negative credit report from Experian. Well, I also subscribe to a service that alerts me to any changes in my credit reports and/or FICO score on a daily basis. And nothing has changed.

He transferred me another person in another department that again tried telling me it was because of my credit report. I have had this card since 2003, never been late with a payment, actually in over 30 years my credit report shows I have never been late with any payments. So of course I pointed that out and asked exactly what in my credit report were they referring to. He just kept repeating the same memorized line over again so I told him I wanted to speak to his supervisor.

A woman got on the phone and repeated the same information. But when I pressed her she said that it had nothing to do with my personal credit report that AMEX and other financial institutions were reducing credit lines based on the current negative economic environment and it had nothing to do with my personal credit. They would not budge.

My husband Googled AMEX and found this article from June in the NY Times:
http://www.nytimes.com/2008/06/21/business/21credit.html?_r=1&oref=slogi... which talks about AMEX and other credit cards reducing lines of credit across the board. And it doesn't matter what your credit score is or how much you make, if you carry high balances or own a lot of property and therefore have several mortgages on your credit report you're going to see your credit lines reduced. If it hasn't happened to you yet, be aware that it probably will.

Now you'd think that with the current economic conditions requiring banks to tighten their belts that they'd be encouraging credit worthy people to carry balances so they can collect interest. I mean, they've got to do everything they can in these tough economic conditions to tighten their belts and cut costs to keep AMEX financially sound, right? Especially since the chairman and chief executive of American Express, Kenneth I. Chenault, received compensation valued at $53.2 million in 2007, nearly double the $27.3 million he received in 2006. http://www.nytimes.com/2008/02/26/business/26amex.html

Oh? Wasn't it the mismanagement of these same financial institutions that created this current economic mess? But it must be tougher now to manage them, so the top management really need to take more money from their struggling companies in order to compensate them for the terrible job they did in the first place!

Posted on: Tue, 09/16/2008 - 10:51 Mary said:

I'm updating my old post in the thread "First HELOC's, now Credit Card Limits are getting reduced! Watch your FICO scores DROP!" because I think the new wave of credit cards lowering credit limits is really going to start affecting people's FICO scores. After all, they are based on the total amount of credit you have relative to your debt. Your debt isn't changing at all when they drop your credit line, but since they are dropping it to whatever you have outstanding, plus a little to cover their next interest assessment, practically everyone will see a change in their credit scores, won't they? For example, now instead of having only 40% of your available credit outstanding you're going to go to almost 100%!

I'd really be interested in comments about this. I debated about adding it to the "Futurology, Trend Identification" thread because I see it having major impact on FICO scores and how credit worthiness is going to be assessed in the future. Remember, your credit lines are based on your FICO scores which do NOT take into consideration how much you make. So even if I made $10,000,0000 a year (I wish!!!!) if I have lots of real estate loans and carry lots of balances on my credit cards because my cash is invested elsewhere, I'm going to get hit by these credit line reductions.

Posted on: Wed, 09/17/2008 - 22:00 Mary said:

That's interesting, because how many more big corporations can they bail out? I would have thought that people would have gotten more concerned with the bail out. Of course the government can just start printing more money if it needs it.

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