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This is a new one. June Miller, a self-employed real estate investor in the Midwest, needed a short-term loan to cover some cost overruns on a remodeling project until her business income caught up. As so often before, she turned to her small business credit cards to look for a balance transfer offer that would give her an easy, inexpensive short-term loan.
She decided to use a convenience check with a four-month 0% APR balance transfer offer from Bank of America. However, the transfer came with a 3% transfer fee, so she called the card issuer to see if they had any better offers available over the phone.
The customer service rep offered her a no-fee balance transfer at 6.24% variable APR with no expiration date. Miller was only planning on holding the loan for a couple of months, so even with the 6.24% APR, that would be a savings over the 3% transfer fee.
She decided to take the offer. The rep took the information needed to make the transfer, and then asked Miller to hold for a moment while he passed her on to a credit analyst. The credit analyst pulled and reviewed Miller’s personal credit report and her business credit report. She then took Miller through a detailed interview, asking details about her annual income, sources of business income, her real estate holdings, her mortgage, her savings, and the purpose of the loan she was taking out.
“I thought they were just going to read me the usual disclosures,” Miller recalls. “Instead, we spent almost fifteen minutes on the phone, while they basically did a complete loan evaluation and review. It was like getting approved for a regular bank loan.”
When Miller asked the credit analyst about this new practice, the analyst explained that they always did periodic reviews of cardholder accounts. Since they hadn’t spoken to her for a while, they wanted to do a review of her credit card account and update the financial information for her and her business.
Fortunately for Miller, she passed the review and got her no-fee balance transfer, and her credit limit stayed the same. Other cardholders are not so lucky, however. Over the past six months, small business owners and consumers alike have seen their card limits slashed, sometimes by as much as 90%, often for no apparent reason and with little notice. Even consumers with high credit scores and a decade-long history with their credit company have not been spared.
Credit card companies have always performed periodic reviews of cardholder accounts, often by making a soft pull of cardholders’ credit report (which doesn’t count against your credit score). In the wake of the credit crisis and increasing credit card defaults, however, credit card companies have become much more risk adverse, and they are applying very different underwriting standards.
In short, get ready for a review of all your credit card accounts. If it hasn’t already happened, it’s coming soon to a card near you. If card issuers don’t like what they see, you too will likely see limits slashed and interest rates hiked.
People who charge a lot, have a great credit score, and who don’t carry a balance forward, won’t have much to worry about. However, if you have credit card debt, watch out. People with a revolving credit card debt are most at risk for attracting scrutiny. And don’t think you’re protected just because you have a high credit score. Card issuers are targeting people across the board, irrespective of credit scores.
To play it safe, at least until the credit environment gets less restrictive, do whatever you can to make sure you pass any credit card review with flying colors: pay all your bills on time, pay much more than the minimum due each month, and above all, keep your credit card debt well below 30% of your credit limit.
But in the current environment, it’s smart to go one step further. If you are planning to take out a large balance transfer, call you card issuer and explain what you’re planning to do and why. Explain that you want to make sure the new balance won’t affect your standing with them. Your card issuer will make a note on your account about the conversation, so if anyone later reviews the account, they won’t interpret the new balance the wrong way. This is just an extra precaution to prevent nasty surprises down the road.
