As the economic downturn continues to squeeze finances, more and more banks are lowering credit limits and canceling credit card accounts. Many of these account closures and reductions are without notice to consumers. This clandestine shutting of accounts can have a ruinous effect on credit scores, further exacerbating the finances of millions of Americans.
Coronavirus Comparisons to the Great Recession
According to a Federal Reserve study in late 2008, roughly 20% of American banks opted for lowering credit card limits. Even more noteworthy is that banks took to slashing a whopping 60% of the credit limits of subprime borrowers.
That was during the height of the 2008 recession, but the severe economic downturn of the coronavirus pandemic poses an even more significant challenge to the economy. The global economy is currently experiencing a much greater impact because of the COVID-19 outbreak, and now many lenders are seeking to reduce their financial risks in much the same way they did during the 2008 crisis.
Tens of millions of Americans are finding themselves unemployed. This is one of the highest rates of unemployment in a century. Despite this, however, banks are beginning to slash credit limits. This, in turn, is considerably reducing the ability of subprime consumers to weather the coronavirus storm.
A Worrying Trend for Those with Bad Credit
A subprime borrower is an individual with a credit rating of fair, bad, or no credit history. Those with bad credit scores suffer the most from credit limit reductions because their limits likely were not that high to begin with. This means that they have less of a buffer for credit utilization. Using too much credit makes them appear as a larger risk to lenders in the future, further reducing their chances for additional credit. This is a vicious cycle that is difficult to overcome.
How to Protect Your Credit Score During COVID-19
Because of the chaotic nature of the COVID-19 economy, protecting your credit score is essential. This is especially true due to the harm lowering credit limits can cause. Credit monitoring services can help ensure any reductions to credit limits are caught immediately. These services allow consumers to be proactive about their credit and take appropriate action to safeguard their scores.
One option may be to apply for a secured credit card. Because secured cards require a cash deposit, they provide a reduced risk to lenders, making them much easier to get. Adding a secured card can boost your overall credit limit. This step can reduce your credit utilization and helping you maintain your credit score.
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