How the Credit Card Companies Are Taking Your Credit Away

Did you know that the credit card companies are now reviewing credit lines and if your income is down, they can reduce your credit. You may think you are secure, but then get a letter in the mail telling you that the amount of credit available to you has been reduced. Or if you apply for another credit card, the bank will look at all of your cards, and your call may trigger this credit card reduction.

I know because this just happened to me with the Bank of America, which has recently acquired Countrywide, the largest holder of mortgages in the U.S. — and why it was on the verge of collapsing before being acquired. What happened is that I have a no-interest loan that is about to readjust in July after 5 years. And in today’s economy, it is virtually impossible to get refinancing for most loans. So one loan broker who couldn’t get me a new loan helpfully referred me to Countrywide’s department that is handling loan modifications, where you might be able to get an extension of the current interest rate.

As the woman who answered explained, basically, you need to provide a couple of months of bank statements, your tax returns for the last year, a list of month to month bills and expenses, and then your information will be reviewed on a case by case basis. At the end of the call, she helpfully explained that I might apply for a Bank of America rewards card that might help me with the payments, since it was a no-interest promotion for 6 months. And she could refer me to a credit card specialist who could give me an instant approval for the card.

Fine, I said, since it sounded like a great way to get some extra credit at no interest while my business picked up. But what she didn’t tell me is that the credit card specialist would be reviewing all of my Bank of America cards, and besides approving this promotional card, the specialist could reduce the credit available through these other cards. The upshot was that after granting me $5000 on the new card, she reduced a $30,000 credit limit on another card down to $15,000, and then reduced or eliminated the credit available on two other cards which a bank manager had signed me up for. So the net result was that I suddenly lost about $22,000 in credit by responding to an offer to help me.

When I protested that this wasn’t right — luring a long-time customer in to accept what seems like a better offer only to end up in a worse credit position, her explanation was that even if I didn’t call, the bank does periodic reviews and they might have reduced my credit anyway. Or maybe not.

In any case, the incident served as another warning about how not only banks but credit card companies are cutting down on the funds available to consumers today. Is this a good way to stimulate the economy by making it harder for people to have funds to make purchases, start businesses, or make investments, which is what is needed to provide that stimulus? I don’t think so.

So just be warned. You may think you have a certain amount of credit available to you. But it may turn out to be less than you think.

The History of Credit Cards

Credit Cards Replacing Paper Money

A credit card is a small piece of rectangular plastic that is no thicker than a sheet of paper, though it cannot be folded. Initially credit cards were metal tokens in the shape of coins, then they changed to metal plates to celluloid then fiber and now plastic with perhaps a photo of the holder and a magnetic strip on the reverse containing security information such as a personal identification number enabling the card to be used at money dispensing machines (ATM’s) and merchant establishments.

What is meant by ‘Credit’?

Credit is the system of buying some produce or service without having to pay for it at the time of the transaction. The payment is made at a pre-determined later date with the addition of a fee to the bill amount. This is like loaning someone money to buy something without actually giving them the cash but instead giving them the product they want to buy. So, the system of credit is not new to humanity in fact, it is as old as civilization itself or perhaps even older. The entrepreneurs of the inhuman kind have been proclaimed responsible for identifying human needs and wants as a rollicking business, and so they invented the credit card system. Though, disputed by many, The Diners Club is credited to be the ones to invent the credit card in 1950.

When Were Credit Cards Invented?

In contradiction to the theory that ‘The Diners Club’ started the credit card system, the Encyclopedia Britannica records the origin of credit cards in the United States as far back as the 1920’s. During this time firms such as oil companies and hotel chains started issuing credit cards to their regular and valued customers who were free to use their services and pay them at a later date. These cards were only useful for purchasing goods and services from the companies and establishments that issued the card. However, references to credit cards have been found as early as 1890 in Europe. It was only in the late 1930’s that companies started accepting each other’s credit cards and this is when things began to get complicated for accountants.

Computers Promoted The Use Of Credit Cards

In the beginning there were no computers to record the credit card transactions and the process of verifying the credit balance of the card was done manually through a regularly updated credit card directory, much like a telephone directory. This system was time consuming and tedious and provided many loop holes for credit card fraud. Today, with computerization, the use of a credit card is instantaneous. All one needs to do is to ‘swipe’ the card through a slot machine and the amount entered. If there is adequate balance in the account of the holder the transaction is completed and the customer billed a month later. Usually credit cards allow for a 50 day credit free period. If the outstanding bill is paid during this time the customer does not have to pay any interest on the transactions, else there is a whopping 2.9% charge per month on the bill amount.

Who Issues Credit Cards?

Banks and financial institutions are the main issuers and promoters of credit cards. The invention of the first bank-issued credit card is credited to John Biggins of the Flatbush National Bank of Brooklyn in New York. This was the year 1946 and Biggins did not know at the time that he had hit upon an idea that would take the world of credit by storm in times to come. From this first credit card called “Charge-It” many cards have flooded the market such as the all famous “American Express” credit card and the Diners credit card. The Bank of America issued the BankAmericard in 1958. This card is now known as the “VISA” card. Around the same time the popular MasterCard came into being. These are the two prevailing cards being used today. The era of plastic money had begun.

How the Sub-Prime Crisis Changed the Credit Card Game

Before the so-called “subprime loan crisis,” credit was easy and the percentage of loss in bank’s credit card divisions was compensated for by increases in market share. With banks taking multi-billion dollar losses as a result of fallout from that crisis, this is no longer the case. Instead, banks are doing everything they can to squeeze every ounce of profit and prevent taking on any additional risk in their credit card divisions. In other words, if you think credit card companies were sneaky before, you ain’t seen nothing yet.

This has resulted in several significant changes in offers for credit, particularly in offers for promotional credit rates on credit cards. The first of these changes is that most banks have significantly increased their up front balance transfer fees on promotional rate offers.

Prior to the crisis, it was not uncommon to see balance transfer offers with no up front fee. More commonly, the fee would be 3% with a maximum of $75 or $99. Now, not only is there usually no maximum on that 3% fee, but some banks have started to charge a 5% up front balance transfer fee with no maximum, resulting in actual interest rates almost as high as regular rates on credit cards!

The second change is that before the crisis, it would be common for accounts in good standing to offer 0%-2% interest promotional rate offers, including low interest “life of the loan” offers. The strategy of the credit card companies was to increase market share of debt, knowing that a certain percentage of borrowers would forget their promotional rate was ending, and therefore start paying regular interest for at least a month or two, or maybe more. Now, it is all but unheard of for people to get 0% offers on existing credit card accounts, and “life of the loan” offers, while still being offered are often at rates above those offered for home lines of credit.

It still is common for people to get 0% offers for opening new accounts, but frequently these offers are deceptive, because the balance transfer fee is – you guessed it – 3% up front with no maximum.

One strategy some have found effective is to cancel unused credit card accounts, and then apply for new ones. While it can get you better offers, it might also affect your credit rating, so beware if you are looking to buy a house, refinance, or finance a large item.

The third significant change is that credit card companies are doing their best to unhinge low interest “life of the loan” deals they made in the past. This is how they do it: Let’s say you owe $10,000 on a 1.9% promotional rate for the life of the loan. You will almost certainly be inundated by offers on that account for 0% interest loans for a short period of time, say three to six months.

The reason for this is sneaky, cleaver, and obvious. The bank hopes that you will take advantage on that 0% loan, and not pay it off before its due date. If you do pay it off completely before the revert rate, fine. If you fail to pay it off before the rate reverts to the regular rate of the card, you will find yourself in a classic credit card company trap: Because credit card accounts allocate all payments to pay lower interest balances before higher interest ones, all your payments above actual finance charges will go to pay off that low “life of the loan” 1.9% balance, leaving your regular rate balance earning high interest, perhaps as much as 18% or more for the credit card company.

In order to pay off that new balance costing you 18%, you would have to pay off the entire 1.9% balance in full. As I said, its one of the classic credit card company dirty tricks.

Frequently, banks make these offers not only with 0% interest, but without any balance transfer fees whatever. While these kinds of offers can be utilized effectively – if you know what you are doing and know how to plan effectively – one mistake, one lapse of attention that results in your not paying the complete balance of the 0% loan before it reverts will trap your balance at the high regular interest rate of the card until you pay off the low interest life of the loan balance.

In summary, read all promotional offers carefully, and do the math to make sure you really want it before taking advantage of it. And before doing any really tricky maneuvers, plan it out carefully – hopefully as a result of a long term strategy – before opening yourself to be slammed by yet another credit card company dirty trick.