There is bunch of new credit card regulations coming from the Federal Reserve and a law over credit cards is creeping its way through congress. Most of the proposed actions will be watered down or even turned to credit card company favors. In the second quarter Master Card and American Express spent $1.1 million each on lobbying efforts.
There are some big perversions within the U.S. credit card system. A little known one I stumbled upon is the relation of credit card interest rates and the FICO score which is used to evaluate ‘creditworthiness’.
There are several components in the FICO calculation. One is them:
The FICO score evaluates your total balances in relation to your available credit. This is known as credit utilization. Credit cards that are "maxed out" can lower your score. Try to spend only 30% of your credit limit.
Currently many credit card companies are lowering their customers credit limits without prior notice. They argue that this protects them from bad customers who max-out their cards before going bankrupt.
But the measures are taken against all customers in an area or of a specific class independent on the actual risk. The interest rate credit card holders have to pay on any balance
is partly determined by the FICO scores. Thereby lowering of their credit
limit increases the interests the customers have to pay.
High credit limits are often used as a marketing gimmick to attract new customers. Lowering those limits is sold to the public as cautious business practice.
But I suspect that it is simply used to increase the income of these companies. When they lower the credit limit on whole segments of customers as they seem to do, they may prevent some damage from a few percent of customers that go bankrupt. But at the same time they increase the interest rates all customers in those segments have to pay.
As far as I can tell this perversion will not be addressed by the fed or by congress.