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Mark Gerhard's heart sank when he discovered Washington Mutual had slashed the available credit on his home equity line this summer from $160,000 to just $20,000.
The artist, who lives near San Francisco, had been counting on the credit line to help pay tuition when his son starts at the University of California, Berkeley, next fall.
So Gerhard fought back. He paid $300 for a new appraisal of his home that showed its value had dropped less than 10% and that he still had plenty of equity. Washington Mutual not only restored his old credit limit but reimbursed him for the appraisal, Gerhard said.
Still, he worries.
"Once they gave me back the loan, I got paranoid that they would (cut the limit) again," Gerhard said, "so I contemplated borrowing all $160,000, just to be sure I would have access to the money."
- Video: The nation's credit freeze
Such is the uneasy state of affairs in the world of consumer credit. Many borrowers successfully fight back against home equity freezes and lowered limits on their credit cards. But some of the victories may be only temporary as the credit picture worsens.
The growth in revolving lines of credit, primarily credit cards and home equity lines of credit, exploded in recent years as lenders chased record profits. Credit card debt more than doubled between 1995 and 2005, according to Federal Reserve statistics, while home equity lending ballooned from $138 billion to nearly $500 billion in the same period.
Falling home prices and rising defaults have led to a swift about-face, however:
- Since late 2007, lenders have been freezing or closing accounts and slashing lines of credit as they try to reduce their risk.
- The cutbacks have accelerated in recent months as the economy deteriorated and investors balked at buying loans. (The furious growth rate of consumer debt depended on lenders being able to sell existing debt, bundled into securities, in order to fund more lending. Credit has grown so tight that consumer debt actually fell in November -- for the first time in U.S. history.)
- The squeeze is far from over. Home prices continue to tumble, with no clear end in sight. One prominent banking analyst estimates credit card lenders will cut $2 trillion of the $5 trillion in available credit lines over the next 18 months.
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Instead of targeting delinquent consumers as they have in the past, lenders are now taking action against huge groups of borrowers -- raising rates or lowering limits on credit card customers who pay on time but carry large balances, for example, or freezing home equity lines for every homeowner in certain troubled real-estate markets.
"Banks are counting on consumers just accepting this," said credit expert Ben Woolsey, the director of marketing and consumer research for CreditCards.com. "Just like the stock market is going down and costs are going up, they're hoping consumers will just swallow this as a fact of life."
You shouldn't, of course. Lowered credit limits can really hurt your credit scores, the three-digit numbers that lenders, landlords and insurance companies use to evaluate you. The leading FICO credit scoring formula is quite sensitive to how much of your available credit you're using. When your limits are lowered or an account is closed, your existing balances loom larger and can seriously damage your scores.
The good news: You may have more leverage with your lender than you think. But how you fight a credit freeze depends on whether it's a home equity line or a credit card.
Continued: What you need to know
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