Lowered Credit Card Limits May not be a Bad Thing

by : Andrew Regan

In recent weeks, newspapers have reported that high street banks are slashing credit card limits and turning down more applications than last year. In addition, banks are purportedly monitoring credit card users more closely for impending signs of trouble. Bank chiefs say that, in the wake of increased levels of consumer debt, they hope these measures will cut the cost of servicing problem borrowers.

A Barclays spokesperson claims this has nothing to do with the recent credit crunch, but is a result of a review of credit card policies started last year - its actions follow Barclays' disclosure of impairment charges of ?1.5bn in its credit card business. The group is also thought to be looking for a buyer for its consumer loan business, FirstPlus, for less than its ?4.5bn loan book value.

The Consumer Credit Counselling Service, the largest debt advice charity in the UK, said that demand for its services was soaring. "We received 18 to 20 per cent more calls to our helpline over the first six months of 2007 than in the same period last year," James Ketchell, of CCCS, told The Times.

New international solvency rules, named under the banner Basel II, are set to affect banks' policies on credit limits. The new rules require banks to have an extra capital cushion for unused credit in overdraft or card facilities. That imposes an extra cost on a bank if it offers a customer a credit line on which she is not currently drawing, and is a further incentive for banks to decrease customers' credit limits. The rules come into action on 1st of January next year.

Even thought this may sound like bad news for consumers, a spokesperson from HSBC told Mortgage Strategy: "This is all part of the way we look at how customers are able to repay money, protecting them from fraud and meeting requirements of the responsible lending programme."

Indeed, critics of the ubiquity of credit cards may welcome these recent events. The American documentary Maxed Out, released last year, for example, focused on how this ubiquity led to millions of Americans accepting credit cards without properly researching how they were going to repay their debts.

What this means for consumers looking for new credit cards is that it is increasingly important to compare different products in order to find the ones most suitable for themselves and increase the likelihood of their applications being successful. A higher credit balance might seem appealing, but ultimately, if a potential customer isn't realistically able to keep up the financial commitment, another credit card might be better suited, leaving the card-holder and provider better off in the long-run.