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Current crunch puts squeeze on plastic

The Baltimore Sun

Consumers are not just having a tougher time getting auto loans and mortgages. The credit crunch and weak economy also are taking a toll on credit cards.

Maybe you have noticed that you're getting fewer offers for credit cards in the mail these days. If you have iffy credit, you might find it difficult to qualify for a card now. Or you may be able to get one only at a high interest rate.

Even if you're not shopping for a new card, you might not be immune from the changes. Your card company might reduce your credit limit or cancel a card you don't use.

"When the economy is contracting, when unemployment and default rates are on the rise, card issuers - as well as other lenders - go on the defense," says Greg McBride, senior financial analyst with Bankrate.com. "Cardholders are on a shorter leash."

Credit card companies have been tightening their standards for more than a year as the economy soured and the chance rose that customers wouldn't be able to keep up with payments. Issuers are unlikely to loosen up until the economy significantly improves. That might be some time. If you are having trouble getting a card, or one with favorable terms, you should start taking the financial steps that over time will make you appear less of a risk to card companies.

Customers with stellar credit, of course, will still get a bump up in credit lines and favorable interest rates - even in this environment. But which customers are considered desirable has been evolving during the past year and a half.

It used to be if you had a FICO credit score of at least 700, among other factors, you had no trouble getting a card, says John Ulzheimer, president of consumer education for Credit.com. Now, you need a score of 720 or higher, which more than half of American consumers do, he says.

"We have seen some situations where 780 is the target score," Ulzheimer says. Only 17 percent of U.S. consumers score that high or greater, he says.

Credit card issuers say they have always monitored accounts but acknowledge they've stepped up their efforts.

At Bank of America, more card applications are undergoing an extra review by credit specialists, says spokeswoman Betty Riess. The bank also is taking a more aggressive look at existing accounts and will lower a credit limit if a customer has become a higher risk, she says.

At American Express, about 20 percent of card holders get an adjustment to their credit lines each year. It used to be that 80 percent of those would get a boost to their line of credit, and the rest received a decrease, says spokeswoman Kim Forde. That started changing in the middle of last year. Now, half of card holders undergoing a review of their credit limit will get an increase; half will get a decrease, Forde says.

Many factors, not just a credit score, influence the decision on whether to reduce a credit limit, Forde says. American Express will take into account customers' income, payment history, outstanding debt and whether they have a subprime mortgage or a mortgage in an area of the country where housing prices are cratering, like California or Florida.

It will also cancel an inactive card when the owner's risk profile changes for the worse, Forde says.

Card experts say other issuers also have closed unused accounts that cost them money to keep open.

Reductions in credit limits can be sharp, said Curtis Arnold, founder of CardRatings.com. Some card issuers have cut credit limits near the level of the customer's balance, putting the customer at risk of going over their limit and getting hit with a fee as high as $39, he says.

Arnold says he also has noticed that card issuers in the past few months have become more tightfisted in other ways.

Some card issuers are increasing the fee to transfer balances from one card to another, he says. Others are putting limits on how far rates can drop.

Bill Hardekopf, chief executive of LowCards.com, says he used to advise consumers to review their card terms once or twice a year. With so many changes now, he suggests they do so three or four times annually. LowCards.com posts terms on more than 1,200 credit cards on its Web site.

Besides tightening their credit standards, card issuers started pulling back on direct-mail offers for cards late last year. That's good news if you consider these solicitations junk mail but not if you're shopping for plastic.

In the second quarter of this year, card issuers mailed out 1.06 billion solicitations, a 17 percent decline from the corresponding quarter a year earlier, according to the latest figures from market researcher Synovate.

The biggest retreat in the quarter came from Citigroup and HSBC. Citi cut its offers by 45 percent in the second quarter from a year earlier. HSBC, which targets customers with weak credit, slashed its solicitations by 54 percent.

The number of offers in the second quarter is the lowest since late 2003, when consumers were still recovering from a recession and bankruptcies spiked, says Andrew Davidson, Synovate's vice president of competitive tracking services.

Consumers across all income levels are getting fewer offers, but lower-income and high-risk consumers are most likely to find an empty mailbox. About half of households with income under $50,000 received at least one credit card offer in the second quarter, compared with two-thirds a year earlier, Synovate found.

Emily Davidson, a financial expert with Credit.com, says fewer direct-mail offers will especially hurt subprime customers. When they receive a card offer in the mail, they have been prequalified, and the chances of getting the card are better, she says.

But if they aren't getting offers, they will end up shopping around. And applying for numerous cards will lower their credit score and make them appear a worse credit risk to card companies, she says.

The number of mailings are expected to keep falling the rest of this year, Synovate's Davidson says. Part of that will be because of the failure of Washington Mutual, which was recently seized by federal regulators and sold to JPMorgan Chase. Card issuers this year will likely mail out a total of 4 billion to 5 billion offers, Davidson predicts. The peak occurred in 2005, with 6 billion offers.

"Given the economy, we won't see it pick up until ... toward the end of 2009, if not 2010," Davidson says.

Arnold says consumers with low credit scores should concentrate on building their credit.

You can improve your credit score by paying your bills on time and making sure your balances aren't near the credit limit. Experts suggest keeping your outstanding balances no more than 30 percent of your available credit.

Review your credit reports regularly to make sure they are accurate. Information on them affects your score.

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