Rate of Borrowing Decreases — Along with Credit Lines

In August, the Wall Street Journal Online reports, consumer credit dropped. (Hat tip: Miki at Leadership Turn for putting me on to this.) Outstanding debt decreased in August for the first time in ten years. I think the current economic troubles are starting to wake people up to the dangers of excessive consumer debt. People are scaling back and making hard decisions.

Or, it could be that they just can’t get any credit. With the credit market freeze, it’s actually getting increasingly difficult to borrow. The banks are wary of lending. Turns out lending to anyone hasn’t been working out all that well. As a result, though, even people with good credit are having a hard time getting credit or loans.

Credit limits are dropping

Another personal finance issue emerging from the current economic crisis is the fact that credit limits are actually dropping. Over at Gail’s Blog, I read this interesting tidbit:

Of the 20% of American Express clients who saw their limits reviewed as a part of normal operating procedure, FIFTY PERCENT saw their limits go DOWN. That means that to maintain a healthy credit ratio (remember, no more than 60% of you limit should be used) a lot of people are going to have to find the money somewhere, or reconcile themselves to watching their scores plunge. Someone with a $2,500 balance on a card with a $5,000 limit is using 50% of their credit line. But if that limit drops to $2,500, they’re now using 100% of their available credit, which is the biggest of no-nos.

You can see how this is a Big Problem. Not just from the standpoint of having debt (because, really, perhaps it means that we’ll start changing the way we do things), but from a credit score standpoint.

If you have been somewhat responsible and have been trying to get out of debt and fix your credit, this is a big step backward for some people. It means that now — in terms of credit — you have to essentially start from pretty close to scratch because your score is going to drop.

Another area of credit getting hit: The HELOC. If you have a HELOC, be aware that your limit might be decreasing, or that an outright freeze may be placed on it. Be watching the mail for that letter…

image credit: sxc.hu