Lower Credit-Card Limits Hit Holiday Shopping

Here's a scenario that will be more common this holiday season: You fill your arms with purchases and head to the register, where you've been told you'll receive a 20 percent discount by applying for and using the store's credit card. That will help, because you're already nearing your MasterCard limit. But a moment later, the teenage salesgirl says, "Sorry, you've been denied." You slink out, gifts left at the counter, angry and a little bit ashamed, too. Didn't the store encourage you to ask for the card?

That's just one of many ways that this is going to be a different kind of Christmas, as retailers' biggest season collides with newly tightened standards from credit-card companies. Banks and other card issuers have been ratcheting down consumer credit limits, raising interest rates, closing down accounts completely and getting tougher about whom they'll give their cards to in the first place. "Every issuer is looking at this," says John Ulzheimer, president of consumer education for credit.com. "It's one of the top two issues we are hearing about from consumers, and that is a significant change." Since few card issuers are willing to disclose their decisions, it's unclear exactly how many Americans will be affected this holiday season.

At the same time, retailers are trying to fight back by pushing their own cards and starting Christmas sales and displays early. Customers can be expected to use less credit and more cash, propelling them to local stores and away from online merchants. Analyst Dana Telsey, of the equity research and consulting firm the Telsey Advisory Group, expects an even slower holiday season than the anemic one that's been projected. The National Retail Federation had been predicting a 2.2 percent increase in sales this holiday season, the slowest growth in six years, and that was before October's credit meltdown. Sales of big-ticket items like flat-screen TVs could be particularly weak, because the usual "one year, no payments, no interest" offers that often accompany those sales won't be as plentiful.

Credit may be more easily available at retailers like Target and Nordstrom, which own and manage their own credit-card programs. Most retailers turn that process over to banks, which use their own credit standards to vet customers applying for the store cards. That's how consumers can end up caught at the register between a merchant pushing new plastic and the issuing bank behind the program saying no.

Card issuers are making the adjustments to reduce their risk, says Ken Clayton of the American Bankers Association. "We are taking a more aggressive look at customers' risk profiles and their performance with us," says Bank of America spokeswoman Betty Riess. "We are closing some inactive accounts and tightening credit. We may adjust customers' lines."

American Express has reduced credit limits on one of every 10 customer accounts and is evaluating everything from the job and real-estate markets in customers' communities to individual customers' credit scores, payment histories and spending patterns. AmEx has admitted that it looks askance at "certain merchants"—though it hasn't identified which ones—who it says show up in the charges of customers with a higher probability of default, according to Kim Forde, a company spokeswoman. Credit.com's Ulzheimer says he has heard a subprime credit-card issuer admit to cutting credit on customers who patronize bars and marriage counselors.

For the most part, these credit-card reductions are affecting the unused portion of consumer credit lines. Someone who has a $20,000 credit limit but is only using $5,000 of their borrowing power may see their credit limit cut to $10,000. In other cases, issuers are "chasing the balance"—in the above example, they would cut the credit limit to the $5,000 level. As the customer pays the balance down to, say, $4,000, the limit would also be decreased, to $4,000.

All of that has hurt consumers' credit scores, because one important element of the score is the percentage of available credit being used. The higher that percentage, the worse the score. Consumers who see their scores fall will have a harder time getting car loans, home-equity lines of credit and those store-based credit cards.

Tightening credit limits will force some consumers to spend less this holiday season or to spend as they go, with cash and debit cards, rather than with credit cards. That may be better for their bottom line, but worried retailers are starting the season early in the hopes of snagging more of those customers who have to spread out their holiday spending over a longer period. The trees and toys have been out for almost a month at Neiman Marcus and Wal-Mart, notes analyst Telsey.

For consumers, the silver lining is prolonged, deep discounting as the holiday season begins. But before heading to the register, they'd be smart to double-check their limit. Issuers send letters to cardholders when they're cutting their credit, but "those notices aren't designed to be noticed," says Ulzheimer. That means you may have thrown it out with the credit-card offers that are still coming, albeit less frequently, in the mail. Charge more than your new line allows and you could be rejected at the register or hit with a $30 over-limit fee. And that's worse than embarrassing.