“Credit card limit reduction, low credit risk butterfly side effect”

Use up to the limit to lower your credit score
Unable to respond to unexpected expenses… a vicious cycle of credit deterioration

It is noted that a reduction in the use of credit cards can cause various side effects that focus on low credit users. It is analyzed that as people with low credit use credit cards by filling the reduced limit, their credit score will decrease, and as the accessibility of long-term credit decreases, unexpected consequences may appear.

On the 19th, the Korea Finance Institute emphasized this by citing the US case. The US Consumer Financial Protection Bureau (CFPB) published a report in June of last year by analyzing the impact of reducing the use of credit cards on consumers.

According to the report, credit card companies have reduced usage limits not only for consumer credit risk but also for other reasons such as changes in the economic and regulatory environment. Between June 2008 and January 2010, during the global financial crisis, due to consumer concerns about credit risk, US credit card companies reduced their credit limit by a total of 405 billion dollars (about 530.3475 trillion won). At the time, it mainly targeted consumers with low credit scores. For those subject to the reduced limit, there were about four times as many consumers who had late credit card payments than consumers who had not fallen into overdue credit card payments within the past two quarters.

When the usage limit was reduced, negative shocks, such as a reduction in credit access due to the reduction in the usage limit, were relatively large, mainly for consumers with low credit ratings. When comparing and analyzing the reduction before and after the usage limit for credit cards whose usage limit was reduced between the 4th quarter of 2018 and the 1st quarter of 2019, the remaining credit card limit after reducing the usage limit (amount deducted of the usage limit ) was greatly reduced, and the median remaining limit for all grades, except the highest grade (senior prime), was less than $400.

Specifically, compared to groups with excellent credit ratings, groups with lower credit ratings have fewer credit cards, so if the limit on credit cards to inject is reduced, credit purchases are severely limited. For users in the top to middle ranks, their balances recovered to the original level after 3 quarters after their usage limit was lowered, but for users in the lower ranks, the lower balance did not return to the original level.

On the other hand, there was also a tendency to use credit cards with lower usage limits more actively. As a result, credit ratings were also negatively affected. As the limit was reduced, the limit was filled and used, and it was not possible to respond to unexpected expenses.

Additionally, most credit score models weight credit card usage, and if you max it out, it can be considered a high credit risk. In the end, the credit score went down, especially when there was over-debt, the credit score went down even more clearly.

Domestic credit card companies also lowered the usage limit and reduced benefits such as interest-free installments without the knowledge of consumers when financing became difficult as market interest rates rose earlier this year. Koo Jeong-han, a senior researcher at the Korea Institute of Finance, said, “Especially for consumers with low credit ratings, a decline in credit card usage limits long-term access to credit, making it difficult to respond flexibly to unexpected expenditure.” To prevent this side effect, we need to take a closer look at the usage limit policy,” he pointed out.

Reporter Lee Min-woo letzwin@asiae.co.kr

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