Less Power to Purchase

Joanna Fridinger, owner of a limo company in Baltimore, had the credit limit on her American Express card cut to $1,400 from $19,500 after getting a late fee on another card. (By Katherine Frey -- The Washington Post)

Cecil Bello has stumbled into a new corner of the credit squeeze. The 32-year-old management consultant has had the limits reduced on three of her credit cards.

In September, U.S. Bank notified the Fairfax County resident that she no longer had a $14,500 limit on a card that had a balance of about $5,000. Her new limit left her just $500 from being maxed out, she said.

Then came an Oct. 26 letter from American Express that said she now had a limit of $14,000, down from $22,000. That letter said her "total debt is too high relative to your payment history with us and other creditors."

Early this month, she received an e-mail from American Express notifying her that another card with a $5,000 limit had been reduced to $3,000 and that her new cash advance limit was down to $200.

Bello said she had made more than the minimum payments on time each month.

"I am taking responsibility for paying off my debt," she said. "But when credit card companies trap people this way, it's almost impossible to dig yourself out of the hole."

Like many other card users, Bello has learned the hard way that credit card companies are increasingly putting the clamps on their customers. Lenders are taking a wide range of steps to mitigate their risk as unemployment rates tick up and the number of delinquent borrowers grows. Besides cutting credit limits, card companies are raising rates and fees, and suspending offers such as zero percent balance transfers. They are also making rewards programs less rewarding and shutting down inactive accounts, industry analysts and watchdogs said.

The retrenchment, which follows years of lavishing Americans with offers and ever-increasing limits, is squeezing consumers at a time when they have already lost other avenues for borrowing, such as home equity lines of credit.

"We've been hearing about the liquidity crisis affecting banks for quite a while. Now we're seeing it transform into a crisis affecting people's personal finances as well," said Joe Ridout, a spokesman for Consumer Action, an advocacy group. "The next wave of the financial crisis may well be a credit-card-related crisis."

The signs of the squeeze on consumers are accumulating. Last spring, Capital One notified customers who had made no transactions in three years or more that their accounts would be closed. On Nov. 1, Discover removed the cap it used to have on balance-transfer fees. Average late fees on all cards have gone up about 10 percent in the past year, according to a review by CardRatings.com.

"What's happening is that everyone is looking at the jobless rate, and there's every indication that joblessness is going to increase well into next year," said David Robertson, publisher of the Nilson Report, a newsletter that monitors the industry. To credit card companies, that means a sharp increase in loans that have to be written off as uncollectable, which are known as charge-offs, he said.

Already, there are signs that consumers are having trouble keeping up with payments. According to Moody's Investors Service, credit card charge-off rates rose 48 percent in August from the same time last year. It was the 20th consecutive year-over-year increase in charge-offs. The ratings agency said it expects the numbers to increase throughout 2009, surpassing levels reached during past recessions.