As soon as the pandemic threw millions of Americans out of work, credit card lenders began canceling cardholder accounts and reducing credit lines. New data suggests that this trend has only accelerated.
A survey by credit card site CompareCards reveals that about 70 million people – more than one-third of credit cardholders – involuntarily had a credit limit reduced or a credit card account closed in a 60-day period from mid-May to mid-July.
Lenders moved swiftly to reduce their risk. It was impossible for them to determine which of their customers had lost their income -- and were thus more likely to default -- and which were gainfully employed.
But the survey shows lenders haven’t tightened credit for everyone. Millennial customers were the cardholders most likely to have a credit limit reduced or account closed involuntarily.
High-income cardholders not immune
Customers with the highest incomes -- who are often among the biggest spenders and have the highest credit limits -- were the most likely to say their credit availability had only been reduced in the wake of the pandemic.
When credit limits were reduced, the survey shows it wasn’t by a lot. The most common credit limit reduction was between $501 and $1,000. But 22 percent of customers in the survey said they saw their credit availability shrink by $5,000 or more.
About 89 percent of those whose credit availability declined were notified by their lender of the change, but not all were given a reason. Of those who were told why there was a change in their account, about half said it was because of a decrease in their credit score or late payment.
Credit score impact
Losing access to credit will almost always send a credit score even lower. A score will go down if a credit card company reduces the cardholder’s credit limit. It could go down even more if there is a balance on the card. The credit limit reduction means the cardholder is using a higher percentage of available credit, usually a drag on credit scores.
“We're several months into the pandemic and one of the few things we know for certain is that no one knows exactly when this is going to end. Because of that, it's likely that we will see banks continue to be cautious when lending,” the authors write.
There are some things consumers can do to make sure they aren’t the next to lose access to credit. Consider using any dormant cards more. Put a small, recurring subscription – such as Spotify or Netflix – on that little-used card to ensure that it is used each month. Then, set up automatic payments so you never pay late.