Credit-Card Companies Put Tighter Squeeze on Cardholders

The problem is, his credit-card companies are onto him: Whenever he makes a dent in his debt, they decrease his credit limits — a move that could hurt his credit score and cause his interest rates to go up. When, six months ago, Charlton paid his American Express credit-card balance down to $14,000, AmEx decreased his limit from $20,000 to $14,300. Another payment several weeks ago brought his balance down to $10,000 — AmEx then cut his limit to $10,300. AmEx has also slashed the $2,000 limit on a card he rarely uses down to $500, barely above his $300 balance. And the limit on his GE Money Card (issued by General Electric Money Bank) where he owes $7,000, was recently cut from $15,000 to $7,500.

Fearing that his other credit cards may follow suit, Charlton is doing everything he can to pay down his debt as soon as possible. He sold a gold diamond ring that he never wore and listed his BMW 335I, leased in April 2007, on SwapaLease.com, looking for someone to take over his contract. "Maybe it was a knee-jerk reaction, but when [the credit-card companies] started dropping my limits, it really scared me," he says. "I felt like I was standing on loose sand and I needed to get my finances in order."

That's exactly what the credit-card companies are counting on. Faced with a growing wave of delinquencies, they're tightening lending standards considerably, focusing on card members they perceive at highest risk of default. (Chasing balances — the industry term for lowering a customer's credit limit as they pay down their balance — is one way to control that risk.) Unfortunately, these days lenders are expanding the definition of high risk to include many consumers who would have been considered good customers just months ago. Now, cardholders can be subject to greater scrutiny based on where they live or what type of business they run.

In a recent presentation before investors, American Express CEO Kenneth Chenault said the company is "implementing targeted line reductions for specific segments of our portfolio representing the greatest risk," including card members "holding subprime mortgages and small businesses operating in specific industries, such as mortgage companies, home builders and construction-related businesses." Furthermore, he noted that the company is "adjusting credit models to reflect the higher probability of default that exists during a weaker economy, and in geographies that have been most impacted by home price declines."

Kim Ford, an American Express spokeswoman, says that such factors aren't "decisive," as the company always looks at a card member's overall profile.

For Charlton, who lives in Irvine, Calif. — an area he describes as "right in the middle of foreclosure central" — the idea of being under even more scrutiny is daunting. He says he hasn't had a late payment in more than three years, but his credit score is in the 675 range: a number his creditors may frown upon, as scores below 680 can be considered borderline-prime.