Millions of Americans are being sandbagged yet again by consequences arising from the banking crisis.

For the last six months or so, lenders have been wrecking havoc on many of their customers by reducing credit limits, increasing prevailing interest rates, or both.  These unilateral moves have been made by credit card companies, which are virtually unregulated, and by lenders who have extended other revolving credit such as home equity lines (HELOCs.)

To a certain extent this is not new.  Credit card companies have long had a policy of increasing interest rates on customers who are late with several payments or who go over their credit limits and some have even gone so far as to increase interest rates on customers who miss payments on unrelated debt.  But now the parameters on good behavior are getting tighter and consumers report that their interest rates have increased, sometimes by more than 100 percent, when they have been even one day late with a scheduled payment.

The downsizing of credit limits or lines has been even more capricious as lenders have scrambled to reduce exposure to possible defaults as the economy declines and unemployment increases.  Even the best customers have been hit and most are given very little advance notice of these changes.  Some, in fact, claim there was no notice, just embarrassment when a store clerk told them their purchase had been declined.

The effect of these actions on consumers is threefold and one may come as a bit of a shock when one applies for other credit such as a car loan or a mortgage.



First of all, the increase in interest rates is obviously going to cost the consumer money.  Many surveys have concluded that the average household carries around $8,000 in credit card debt.  An increase in a rate from 11.99 percent to 24.99 percent (a common pattern) will raise the yearly cost of that unpaid balance by $800.  All of this increase may or may not be reflected in an increase in the minimum monthly payment but certainly some of it will be and it will take a lot longer to pay off a credit card.

Unfortunately for many individuals already struggling to make payments on time and any increase in required credit card payments may be the final push over the edge.

The lowering of credit limits will impact spending at a time when the government is taking all sorts of measures to stimulate the economy.  While limiting credit card usage is an excellent plan for most people even when it is involuntary, there are people who need to temporarily rely on their cards to meet basic living expenses.  Then there are those consumers who are suddenly unable to carry out planned expenditures; the parent who was opting to use the Visa to cover a child's second semester tuition instead of selling stock in a down market or a planned medical or dental procedure which will have to be cancelled since there is no longer a way to pay for it.

And what about the homeowner who has signed a contract for a major home improvement or is midway through a construction project and relying on their HELOC to pay the suppliers and contractors?  With credit everywhere at such a premium these people have a real problem.

What many people may not expect is the impact these changes will have should they need to buy a car or apply for a mortgage. Credit decisions are generally made based on a borrower's uncommitted funds and credit score.  Any increase in the minimum monthly payment because of rate increases will quickly be reflected on a credit report where it will reduce discretionary income and, in the case of mortgage underwriting, increase the percentage debt load.  But even worse, one component of Fair Isaac Corporation's credit scoring (FICO score) is the percentage open credit a borrower has but has not used.  When credit limits are reduced there is a smaller window of unused credit; perhaps open credit even disappears entirely and with this change in utilization the FICO score is also reduced.  10 percent of a FICO score is based on the amount of this unused credit, and since a credit score partially determines the interest a consumer must pay for new credit we have the makings here of a circular problem.

In the midst of all of this, one can hope that once Congress and the regulators have the time to take a real hard look at the credit system in this country they will put credit card lenders at the very top of their regulation list.  These companies with their over limit fees, late fees, usurious rates, unsolicited credit offers and extension of credit to minors without parental permission have run roughshod over their customers for far too long.