As the economic consequences of the pandemic continue to unfold, banks are rushing to close credit card accounts or lower credit limits to reduce their risk.
One in 4 Americans with credit cards said they had an account involuntarily closed from mid-May to mid-July, while 1 in 3 said their credit limit was lowered, according to a new report by CompareCards.com that surveyed to 1,003 credit card holders.
This follows a similar rate of reductions in April and comes as many Americans struggle with unemployment and an uncertain economic future, but now with reduced access to credit.
A McDonald’s restaurant worker watched a payment card machine pass by using a self-made contact-free extension device to maintain the recommended 1.5-meter social distance from the unit through the customer. (Photo by Robin Utrecht / SOPA Images / LightRocket via Getty Images)
“These are really big numbers,” said Matt Schulz, chief industry analyst at CompareCards. “It means that many Americans had one of their financial safety nets removed in one of the most difficult economic times in American history.”
The pullback by credit card issuers occurs more frequently than in 2008 during the Great Recession, when 1 in 6 cardholders reported reduced limits or involuntary account closings, according to a 2010 study by Phoenix Synergistics, a market research firm for financial services companies.
“This is, in many ways, a much bigger problem today than in the Great Recession,” said Schulz. “It makes sense that banks are taking an even more difficult line with loans because there is so much they don’t know and they are very nervous about the risk.”
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While most credit limits were lowered by $ 1,000 or less, more than 1 in 5 cardholders said their limits were lowered by at least $ 5,000.
“The people who saw the biggest reduction in the credit limit were the high-income people,” Schulz said. “They are more susceptible to credit limit cuts, simply because they will be the most likely to have high credit limits in the first place.”
Americans who earned more than $ 100,000 were the most likely to lower their credit limit. Two out of 5 reported what happened to them.
Millennials have likely lowered credit limits and closed cards. Source: CompareCards
Young people of the millennial generation were the most affected by the generations, according to the report. Four out of 9 young people of the millennial generation, currently aged 24-31, had a closed card, while 5 out of 9 had their credit limit reduced.
“We know that many millennials have been very excited about credit card rewards in recent years,” said Schulz. “So they may have some cards in their wallet that they haven’t used in a long time.”
A reduced credit limit will likely affect your credit score. This is because your utilization rate increases, by reducing the amount of available credit you have, the second most important factor in your credit rating.
“It doesn’t take much to really affect your utilization rate, and potentially harm your credit score,” said Schulz.
