Your Credit Limit May Be At Risk
Banks are becoming more cautious. Rates are rising, applicants are being turned away and credit limits are being cut. The consumer-credit crunch is here!
Back in the late Nineties, I was at financial breaking point. Thanks to a horrible addiction to casino gambling, I'd run up massive debts. (These days, I understand that actually visiting a casino in person is so passé; instead, people run up debts by gambling online!)Eventually, things reached crisis point when the minimum monthly repayments on my debts exceeded my income and my deck of credit cards was maxed out. In effect, I had nowhere else to go and finally tackled my overspending problem. With huge help from my wife, I managed to kick my casino habit and pay off my debts. Later, I discovered the joy of saving, which marked a turning point in my life: earning interest instead of paying it!Anyway, I wonder how much worse my situation would be today, given that banks have been happy to lend money freely to any Tom, Dick and Harry? £100,000? £200,000? Who can say?The credit crunch: from Wall Street to the high streetFrankly, I'm hugely relieved that I cracked my debt dependency almost a decade ago, because I'd be seriously anxious if I were in deep debt at the moment. This is because all the evidence shows that lenders are starting to tighten their belts.Indeed, you could say that were at the beginning of a high-street credit crunch to go with that seen in worldwide inter-bank lending. It's quite clear that, faced with soaring bad debts and rising wholesale interest rates, banks are starting to back away from reckless lending. What's more, they are turning away borrowers in their tens of thousands, and even cutting credit limits for existing borrowers.For example, Barclaycard, the UK's leading credit-card issuer, now turns down half of all new card applications. In addition, over the past year, it has cut the credit limits of half a million existing cardholders. In some cases, Barclaycard has cut credit limits below existing debt levels, forcing customers to scramble to reduce their balances below their lower limits. This may prevent the firm's bad debt from exceeding the £1½ billion it recently revealed to investors.In other words, Barclaycard (and other nervous lenders) are pulling the rug from under many borrowers. This marks a major U-turn in banking behaviour. For years, banks have given unsolicited (and often unwanted) credit-limit increases to their existing customers. Now, the pendulum has started to swing the other way, as they cut their exposure to those they regard as above-average risks. In effect, we're seeing a crackdown on consumer credit which may well continue into 2009 and beyond.One reason why banks are trimming credit limits on credit cards and overdrafts is that new international banking rules require banks to put aside extra capital to cover unused credit facilities. Thus, in effect, excess credit facilities cost banks money, so it makes sense for lenders to prune them where appropriate.So, what will be the impact of banks tightening up their lending criteria? Of course, these steps won't bother people who don't owe any money and have no plans to buy a house in the near future -- which includes me. The people who are most vulnerable are those who rely on borrowing to make ends meet, and those with high levels of personal debt. With consumer credit totalling £214 billion, the average household has non-mortgage debt of almost £8,600, which is an all-time high. Oh dear...Furthermore, given that higher inter-bank lending rates are putting pressure on banks' profits, I expect lenders to respond by raising interest rates on mortgages and unsecured borrowing. This is already happening with tracker mortgages, as I reported last week in More Mortgage Rates Increase, and with `subprime' lending to borrowers with poor credit histories.As I know to my cost, if your credit limit is cut to below your existing card balance, or you have only, say, £50 of remaining credit, then a humbling experience awaits you. In effect, you've lost your spending power and have to go `cold turkey' from overspending. This is a very painful but essential first step in your financial rehabilitation.Finally, my debt nightmare from the Nineties still marks me today. If I had one simple piece of advice for borrowers, it would be this: remember that what you have is a debt card, not a credit card, and you have a credit limit, not a credit target!More: Fed up with paying interest? Then switch your existing balances to a 0% credit card | 0% Versus Cashback Credit Cards | Simple Savings, Great Rates! | Get Out Of Debt