Unsecured Lines of Credit Hurting Banks and Possibly You

Some of the major banks are being hurt with the unsecured lines of credit accounts such as credit cards and what they're doing to correct it can possibly affect you.

It's no secret. Credit card companies are in dire straits today. Over the past decade, they have extended billions of dollars in unsecured lines of credit loans to millions of consumers who, in this economy are struggling to make ends meet. As a result, credit card companies such as Citigroup, American Express, Bank of America, and others are attempting to get certain of these unsecured and personal lines of credit loans off the books to reduce their exposure to expected losses that all of them see coming down the pike.

So, how does this affect you, the average credit card holder? One of the ways in which they attempt to get these loans off the books is to close inactive credit card accounts. If you have outstanding debts, this may directly affect you by increasing the percentage of your debt to available credit.

For example, assume that you have two credit cards each with a credit line of $10,000, for a total of $20,000. Further assume that on one of the cards you owe $5,000.  Your debt to available credit is 25%. However, if the credit card company to which you have no debt or activity, closes your account, your credit line now becomes $10,000. Your debt to available credit ratio, however, has risen to 50%.

As your debt to available credit ratio on unsecured lines of credit rises, so does your credit risk. To compensate, current and future lenders may raise the interest rates that they charge you. So you end up paying more for your loans as well as having less credit available to you.

Some companies, instead of inactivating your unsecured line of credit will simply reduce your credit line. This, however, has the same effect on you. Your debt to available ratio is still impacted and your credit score may be lowered also - even if you are in good standing and have not missed a payment on your credit card. A lowered credit score, will generally cause lenders to raise the interest rates that they offer you. A lowered credit score will also cause you to become ineligible of other lender's loans.

During the past couple of years, millions of Americans have seen their credit scores lowered with the scenario described above.

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