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The financial squeeze is angering credit card holders as card companies peremptorily reduce their customers' spending limits, leaving many with almost no credit with which to buy big-ticket items.
The triggers that result in limits being reduced range from card holders taking on other loans or suffering a drop in income, to their simply being too old, or to the companies wishing to reduce their exposure across a group of customers - and consequently the amount of capital they need to hold to fund those customers' potential borrowing.
A year ago, internet bank Egg enraged customers when it stopped 161,000 of them from using their cards - with only 35 days' notice. Egg said it wanted to reduce its exposure to people with poor credit records, but many irate card holders said they could see no reason for their plastic to be cancelled. Nevertheless, other banks and building societies have since followed suit.
One person who has been affected recently is retired GP Dr James Carne from north London, who was shocked to receive a letter from the Nationwide building society on 29 January informing him that his credit limit had been slashed from £5,000 to £500 with immediate effect. He has been a Nationwide card holder for more than six years and has always paid his bills on time and in full by direct debit. He also has significant savings with the society.
The letter pointed out that Nationwide regularly reviewed customers' credit limits, taking into account their other credit commitments with the assistance of a credit reference agency. It said the intention was to protect the society and its members against becoming "overcommmitted".
Carne, who is 80, said the letter suggested various helplines that he could contact if he was worried about his debts. He felt insulted. "I have paid off my mortgage, I have no debts and I have never been overcommitted," he says.
Assuming there had been a mistake, Carne rang the Nationwide - but was put through to a call centre, where the operator could only offer to "put in an appeal" on his behalf.
Nationwide was not prepared to say whether it is reducing more limits than it is increasing, but spokesperson Jackie Lawrence confirmed that it receives regular updates from credit reference agency Experian, in keeping with its terms and conditions. Getting regular behavioural data on customers from Experian has become the norm among card companies, says Steve Willey, head of credit cards at moneysupermarket.com.
Willey says age may also be a factor. "Some credit card companies have an age threshold, but they don't talk about it. When they are assessing risk, one of the factors they will look at is mortality risk. Although outstanding credit card debts can be reclaimed from somebody's estate if they die, companies try to avoid having to do so as it is not good publicity," he says.
Barclaycard, which reduced the credit limits of 1 million of its 12 million customers in 2007, says one of the reasons it may reduce a limit is if it finds that someone is no longer working. Spokesman Andrew Bond does not see this as controversial. "On the contrary, we feel that we are being responsible lenders. If we turned a blind eye and let people increase their debts when they are unemployed, we would be criticised," he says.
No warning
Observer Cash reader James Gardner was recently caught out by Barclaycard's credit-cutting policy. "I had just repaid £1,500 of my Christmas spending and was trying to pay a £275 vet's bill when my card was declined," he says. "I rang Barclaycard, who said my limit had been reduced from £2,000 to £260. No warning, nothing."
Gardner says that ever since Barclaycard bought Morgan Stanley's credit card business last year, he has tried to "act as an exemplary customer ... I'm not pretending I'm squeaky clean, but I have not had a default for six years."
Barclaycard has advised Gardner to check his Experian file because it says there are more outstanding balances there than the default he mentioned. But it is no coincidence that Barclaycard cut his limit just after he made a large payment. The minimum to which it reduces credit limits is 105% of the balance. So, perversely, if he had maintained a large debt, he would still have a higher credit limit - albeit probably not for long.
Another Cash reader, Della Parrish, had her credit limit cut unexpectedly by First Direct. "After I retired, I set up a First Direct bank account and credit card to keep my newly set up consultancy activities separate from my pension, which goes into my NatWest bank account," she says. "The limit on the First Direct credit card was £6,900, but this has just been reduced to £3,100 without prior notice. First Direct said it was because I had not spent up to the £6,900 limit."
First Direct says Parrish's limit was reduced because of "the recent conduct of all her accounts". It does not like the fact that she holds her main account with another bank, keeping a nil balance at First Direct.
According to Apacs, the credit card companies' trade association, there is no code of best practice on reductions to customers' credit limits. Jemma Smith, a spokeswoman for Apacs, says: "Limits may be reduced for reasons relating to an individual's behaviour, such as frequent withdrawals of cash or spending over the limit. Or it may be - particularly in current times - because a company has taken a policy decision to decrease its exposure across a group of customers."
Left in the lurch
Unlike other forms of borrowing, credit on cards is open ended and unsecured, and Willey says some providers may be looking to reduce their limits for capital adequacy reasons. Under European Union rules, banks have to reserve some capital to cover potential, as well as actual, borrowing by customers.
But reducing limits without warning can leave loyal customers such as Carne in the lurch.
When he checked his credit reference with Experian, as Nationwide suggested - but only after the society was contacted by the Observer - he found that someone had used his name to borrow £14,000 and he has now contacted Experian's fraud investigation team.
When asked whether it would not be more customer-friendly to consult those whose credit limits it planned to reduce to check whether it has the right information, Nationwide replied: "It would be more friendly, but not necessarily prudent. If a customer was experiencing financial difficulties and we were to write and pre-warn them of our decision to decrease the credit limit, this could result in cardholders running up further debts that they may not be in a position to repay."
Jemma Smith, of Apacs, says: "The last time the banking code was reviewed, consultation prior to reducing credit limits was discussed, but most companies felt there was too great a danger that cardholders would go out and spend up to their limit."
• Have you had your credit limit cut - or even raised? Did you mind this? Do you think lenders who cut limits are acting responsibly or needlessly penalising customers? Share your views with us by writing to Cash, The Observer, Kings Place, 90 York Way, London N1 9GU, or email us at cash@observer.co.uk.
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