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2009-01-06 03:55:35

Lower Credit Limits Force Consumers to Spend Less

Year-end holidays are traditionally considered as the peak season for retailers. According to analysts, this winter holiday season happens to be the weakest in decades. The National Retail Federation has predicted a 2.2% sales growth this holiday season. It's the lowest increase in sales in the past six years. Despite the fact that the vast majority of retailers make the most of their profits during the Christmas season, retailers already report a sales drop. As for shoppers, they cut their holiday spending plans dramatically, almost in half of 2007. Lenders, in their turn, increasingly cut spending limits even when it comes for prime borrowers. Read more about credit reductions and their influence on retail holiday season.

A department store card is one of the instruments that can help retailers boost their sales. Just picture that. You head to the register with a pile of purchases, and the clerk asks if you want to get a 20 percent discount. By all means you want and who doesn't? Back in the old days, you can easily apply for a department store card and get that great discount. But this year you can be denied and it is really confusing, as you can be left holding the bag, plus this may hurt your credit score. So, what's the reason? You are encouraged to apply for a card and then you have been denied.

Retailers push their deals to appeal consumers. But the problem is that, most programs are now managed by banks and they have their own standards. And that's how it all happens. The shop entices you to sign up for a new plastic and get good discounts and the bank can say no just because your credit history is not good enough.

Most lending companies are making adjustments to minimize their risks. Now they are evaluating many factors of their customers' activity, including payment history, job, score ratings, and others. Banks and issuers scrutinize their clients' profiles and their performance and as a result, they can slash spending limits, increase interest rates or simply close inactive accounts.

As for regular consumers, reductions like limit cuts can seriously hit them. In what way? There are many middle- to higher-income borrowers who have high lending limits of $20,000 and more. They rarely use more than $5,000. And if those spending limits get slashed to $10,000, this will hurt consumers' scoring rating, because debt ratio is one of the most important elements in scoring formulas. Needless to say how this can affect borrowers. Those customers who see their scores drop, will face more difficulties when applying for loans.

This way, tightening spending limits will force borrowers to spend less with plastics and more with cash. The smart strategy is to double-check your spending limit and other terms. Lenders generally send notifications to their customers but these notifications are designed not to be noticed. And you may just throw it away with piles of credit mailings. The bottom line, be careful about any changes. Now it's more important than ever to be in the know of the changes in your account, as the consequences of your unawareness can be too grave.

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