Your credit limit: use it or lose it

By Marianne Curphey

unused-credit-use-or-lose

If you have a credit card that you rarely use, or you only use a small proportion of your total credit allowance each month, you may find your credit limit cut in a few months.

Credit card providers already are tightening the amount of potential credit they have on their books to comply with new rules on risk management.

For customers, this means that a card you keep solely for emergencies may get taken away, or one with a much higher limit than you use may get a reduced credit limit.

Lenders tighten up
Under new accounting rules, known as IFRS 9, financial services companies must start setting aside extra money in case customers fail to repay credit. This will apply even if a default is very unlikely.

Banks and credit card providers also must make provision for potential losses as soon as they have agreed to extend credit.

The new rules come into force on 1 January 2018. However, some financial services companies are already going through their data and assessing where they can reduce exposure.

It's all to do with accounts that credit card providers class as "inactive", says Stacey West, a consultant with analytics software company FICO.

In other words, if you have available credit that you aren't using, including unused overdrafts or credit card limits, you may find your spending power taken away. Since lenders will essentially be paying for the credit they give out, they will cut back on how much credit they allow consumers to have.

According to FICO's data, which represents about 80% of the UK cards market, there are more than 10 million inactive classic cards alone with a zero balance. That is about 48% of classic cards.

"If someone is only ever using 10% of the credit they have available, then a provider might question why they are being offered the other 90%," West says. "If an economic downturn comes and the customer starts using the credit but they can't afford to pay it back, then that's a problem for the lender."

Will your accounts be affected?
The accounts likely to be affected are those cards that have never been activated, those that have never been used, cards that have been used but not recently, and those with limits that are only partially used.

"Card providers are concerned that in the case of an economic downturn, customers will turn to cards for means of support when their cash flow is tight, but they may not have the means to repay," West says.

She says the definition of "inactive" is not having used your card for 12 to 18 months. Your card provider will write to you to give notice that your credit allowance will be decreased or withdrawn unless you start to use the card again.

"However, for an account where people are paying the minimum payment each month, a provider might decrease the credit allowance immediately if the customer misses a couple of payments," she says.

So, if you have a card that you only use for your annual holiday abroad, perhaps because of its favourable exchange rate, it might be worth making small purchases on it at other times, just to keep it active.

West says one provider has already written to customers to advise them of the change, and found this prompted people to start using their cards again so as to not lose them.

The changes will be introduced gradually, and card companies are likely to see what response they get from small groups of "test" customers before they roll out a full programme, West says.

Overall, the number of customers affected is likely to be "in the millions".

"Typically, in October customers choose of their own accord to pay off their existing debt in order to create headroom for the coming Christmas spend," says Bruce Curry, EMEA collections and recovery business lead at FICO.

But with the new rules coming into effect, doing so could cause lenders to take away some of that credit capacity before the holidays hit, he says.

Should you do your own pruning?
John Webb, consumer affairs executive at the credit reference agency Experian, says there is no harm in having an emergency credit card if you are in control of your finances.

Lenders also like to see that you have some "headroom" between your maximum potential credit allowance and your actual monthly spend, he says.

"If you have a £5,000 credit limit and you are only using £1,000 of it, then that is viewed as positive," he says. "Ideally, the amount you should use in total should be below 25%."

Webb says it is down to individual lenders as to how much they will lend based on your credit score, and what attitude they take to unused credit.

"What lenders do like to see, and what your credit score reflects, is how you use credit," he says. "How much are you using, are you paying it back regularly, can you handle credit?"

He says it is worth looking at your credit cards and, if you have a lot of agreements, deciding whether you need them all.

"If you have a large amount of available credit that you are not using, it does present the possibility that you may use it in the future and that there is the potential for an affordability issue," Webb says. "It is fine to have a spare credit card, so long as you are using it wisely and you know you are able to pay off the debt and have a plan to do so."

If you wouldn't be able to pay back what you spend on a spare card, or on a card with an exceptionally high limit, it might be best to cancel the card or lower your limit. Not only will you prevent an unpleasant surprise when lenders start cracking down in a few months, but you may avoid digging yourself an inescapable debt hole.

See related: FAQs on FCA proposal for helping consumers with persistent credit card debt, Industry responds to FCA's proposal on persistent credit card debt

Published: 20 July 2017