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May 11, 2020

Credit card issuers lower cardholder limits, close accounts

By Mohamed Dabo

As the covid-19 pandemic continues to ravage personal finance across the globe, credit card issuers have begun to cut down cardholder limits and closing accounts without warning.

Credit card issuers tend to lower limits or close accounts to reduce their risk, especially in a financial crisis like the one happening across the globe.

A new survey has found that about 25% of card owners in the US had their limits reduced or accounts closed within the past 30 days.

Almost 50 million people saw their credit limits decreased or cards closed involuntary, according to a CompareCards survey conducted in late April. The affected cardholders were split almost evenly among Generation Z, millennials and Generation X.

A break on opening new accounts

In its regulatory filing last month, Discover said it will slow down opening new accounts as it expects to be hit financially by cardholders asking to skip payments or delay accrual of interest.

A reduction in credit limits or having an account closed not only affects a person’s options to pay for goods in a time of need, but it also takes a toll on an individual’s credit score in most jurisdictions.

Credit utilisation is a measure of how much of your available credit you’re using at a given point in time, and it accounts for 30% of your credit score. When limits are lowered or accounts are closed, the amount of credit a person has decreases, which in turn raises their credit utilization and lowers their credit score.

Voluntarily lowering card limit

Since the pandemic started, there has been an increase in credit card usage, with 47% of US adults carrying a balance on their accounts in April.

This comes on top of a 2019 study showing consumer debt in the US grew to $14.1tr, which was the highest since the Great Recession more than a decade ago.

One in four American credit cardholders said they’ve involuntarily had their credit limit slashed on at least one of their credit cards or even had a card closed by their issuer in the past 30 days

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