by Shannon Hicks March 21, 2023
Credit card companies are beginning to slash credit lines. It happened once before and it’s happening again.
In January 2020 the world economy was pulled into chaos by the COVID-19 pandemic. At that time, several credit card issuers began slashing credit card limits to hedge their risk in an uncertain economy. Fast-forward three years and bank card issuers are beginning to pull back their credit exposure in a new potential pandemic- bank insolvency. Even without the failure of Silicon Valley Bank lenders are becoming increasingly wary seeing signs of an impending economic recession while credit card balances and delinquencies climb.
One population most vulnerable to the coming credit crunch is seniors who may find themselves stuck between higher minimum payments and reduced available credit on their cards.
The National Council on Aging (NCOA) reports 41 percent of households headed by those between the ages of 65-74 are carrying credit card debt. 28% of those 75 and older also carrying a credit card balance. The financial burden is significant for older Americans living on a fixed income. However, the days covering basic expenses with a credit card may be coming to an end.
For example, a retiree with a $5,000 credit card balance and a $15,000 credit line would have a utilization ratio of 33%, just above the ideal ratio of 30% where outstanding balances have little if any impact on a consumer’s credit score. However, if that credit line was reduced to $7,500 the credit card utilization ratio double to 66% utilization of available credit. This reduces the senior’s overall credit score and removes a potential source of funds for emergencies.
Who’s at risk of having their credit limit reduced? Frankly, anyone. However, those who don’t use a card for an extended period of time or show signs of risky borrowing such as maxing out another card are the most likely candidates. Anecdotal reports have emerged of higher-income cardholders with excellent credit receiving a notice of a credit line cut on cards they’ve rarely used.
But what about retirees?
Older Americans who are paying their living expenses with credit cards will need to make some hard decisions. How long can this pattern continue and what happens when credit cards are not an option. Fortunately, many older homeowners could escape the credit card trap by eliminating required monthly mortgage payments and possibly securing a line of credit whose unused portion increases each month. Merely eliminating one’s mortgage payment could allow one to aggressively pay off credit card balances each month, or even in one fell swoop when their reverse mortgage funds. More importantly, seniors may find they have increased financial flexibility without the burden of required mortgage payments, and perhaps later begin making optional payments of interest and principal when their situation has stabilized.
Credit cards are a two-edged sword. The credit banks and card issuers lavished upon us when our economy was awash with dollars can be taken away just as quickly. The advantages of a Home Equity Conversion Mortgage should be explored for its potential to boost monthly cash flow and perhaps provide a source of future credit, a credit line that cannot be reduced merely because of a credit crunch or a drop in one’s credit score.