Recently American Express (AXP) has been lowering the credit limits of their cardholders, and now I have been personally been included. Just today I was notified in an email that my credit limit was being cut from $25,000 to $7900. That’s a $17,100 (68%) credit reduction! I could understand if this was being done for a legitimate reason, such as my credit scores dropping. But no, I am not naive, I do know why they are reducing mine and many other’s credit limits; I just do not think their reasons are legitimate or even business smart.
My three credit scores are around the good/excellent range (720-740), and I do monitor them often so I know they have not decreased (although now they most certainly will). Many other American Express cardholders with similar if not better credit scores (and a long history with American Express) are also feeling the pinch, see here.
The Flawed Strategy
Traditionally American Express has been one of the better management companies in the financial industry, and has been a great investment. But strategies and decisions like this one are very concerning to me as an investor.
Obviously American Express’ strategy in this credit crunch, is to reduce risk as delinquencies mount and unemployment rises. They feel that they can do this by drastically cutting credit limits across the board for all types of borrowers. Since many of the American Express cardholders with excellent credit have fairly high credit limits, $20,000 or more, they have especially been targeting these accounts for 50% or more reductions.
The problem with this strategy is that reducing the limits of those with excellent credit scores does not make sense, especially from a long term outlook. People with excellent credit scores only have those scores because they pay their bills and obligations on time, consistently, though good times and bad. Which is why they are considered low risk borrowers, i.e. they will pay you back! Drastically cutting their credit limits will just deter them from using their AMEX, especially if it’s for business purposes and their reduced credit limit can no longer fund their month to month operations with it.
So does American Express think that their most credit worthy borrowers will go on a spending binge, lose their jobs, and stop making payments?
What it Means for You
If this has happened to you, it means that your available credit will be reduced. This also means your debt to credit ratio (debt divided by available credit) will also be reduced. Consequently this also means all three of your credit scores will be reduced as well, within a month or two of the limit reduction (varies depending on when American Express reports information to the credit bureaus).
So thank you American Express. As a loyal cardholder, without any late payments, and an excellent credit history, I will be sure to remember this in the future when applying for any new credit cards.
Disclosure - I do not own any shares of American Express.
Comment from Dave R.
November 21, 8:17 pm
Yeah a similar incident happened to me. I hate friggn AMEX now. I had a credit limit of 6000 and I paid my balance down to 3400. Not to mention, I’ve always paid on time and above min. payment. Next thing I know, they lowered my credit limit to 3500 without notice!