With millions of people out of work in the U.S., mortgage lenders are getting inundated with calls from people seeking help. And some of those who are struggling have started relying on their credit cards more and more to cover basic expenses. In response, many anxious lenders and creditors are taking a step back in different areas. It’s now become much harder to get a mortgage or a refinance loan. Credit card companies, too, are turning down new applications that, in past times, would have sailed through the approval process. And, in some instances, credit card issuers are lowering existing cardholders’ limits.
What’s Happening With Mortgages, Refinances, and HELOCs?
During economic downturns, banks often stop making loans that they perceive as risky. So, mortgage lenders are increasing the credit requirements to get a new loan or to refinance an existing one. Lenders are now sometimes requiring applicants to have a minimum FICO credit score of 700 and make at least a 20% down payment on a home. Also, several major financial institutions have stopped accepting applications for home equity lines of credit (HELOCs).
What’s Happening With Credit Cards?
Many people with less than stellar credit, as well as those with good credit scores, are having trouble making their credit card payments. So, to minimize their own risk, credit card companies are cutting some cardholders’ limits—often without giving advance notice of the reduction. For most other significant changes to a credit card’s terms and conditions, like a change to the APR or annual fee, the Credit CARD Act of 2009 requires issuers to give 45 days’ notice before making a change. But issuers don’t have to inform cardholders that their limits are being slashed, subject to a few exceptions, like if the smaller limit results in getting charged an over-the-limit fee. Your issuer can also close an inactive card without notice but might let you know before doing so, in case you want to keep it.
If you increase your spending, have a subprime credit rating, or use a hardship program to defer making payments, your credit card company is more likely to cut your limit. According to a survey by CompareCards in late April 2020, 25% of cardholders had their credit limits lowered, or their accounts closed, in the past 30 days.
A reduction in your card limit or a closed account could hurt your credit score. Here’s how: A credit utilization ratio is a measure of how much of your available credit you use, and it counts toward 30% of your FICO credit score. When a creditor decreases your limit or closes an account, your credit utilization ratio goes up. For example, if you have an $8,000 credit limit and your balance is $2,000, your utilization rate is 25%. But if your issuer changes your limit to $6,000, your utilization jumps to about 33%. A higher utilization ratio can hurt your score, especially once it’s over 30% or so. A closed account also can increase your utilization ratio because removing the amount of available credit that this account provides, which is what happens when the card closes, will increase your credit utilization percentage.
How Long Will the Credit Crunch Last?
Lenders and creditors have just started making these and other credit criteria changes to account for the increased likelihood of forbearance and defaults while the coronavirus outbreak is ongoing. Because there’s so much uncertainty in the market, lenders and creditors are uneasy about loaning money right now, and likely will be for some time, even after the national emergency ends.