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Good credit not immune to cuts

Avis Durgan and Jeff Stevenson

TEXT OF STORY

TESS VIGELAND:We've heard from lots of you about how banks are cutting your credit lines. Everything from credit cards to home equity loans. And it's happening at every income level, even to sterling bank customers.

Stacey Vanek Smith has the story of one couple who got caught in their bank's catch-all credit net.


Stacy Vanek Smith: It's a perfect evening in the Southern California beach town of Encinitas. Surfers bob in the waves, pelicans fly in formation, couples gather on a high bluff to watch the sunset. Avis Durgan and Jeff Stevenson come here every night.

Avis Durgan: Oh, the sunset's going to be early tonight, because there's a marine layer.

Jeff Stevenson: Oh we'll see. One of the things we've learned living here is that you can't predict the sunset the way you sort of think you can.

And these days, the same goes for your financial future. Avis and Jeff had a healthy savings, a fat portfolio, a strong 401k and they sold their house at the top of the market. That put them so far ahead that in 2007 Jeff quit his job at Microsoft, and the couple traveled for a year. Then the market collapsed.

Avis: You know, you've been saving for 15 years and it's gone? How could we have imagined that we would have lost half our money in six months?

Almost immediately, though, Jeff -- who's in his late 50s -- got a good job near Encinitas. And with some scaling back, he and Avis -- she's in her early 50s -- were able to buy a house. To help smooth the transition, Jeff and Avis tapped about $20,000 from a $100,000 credit line they had with Wells Fargo. They'd had the line for 10 years and rarely used it. Then the letter came.

Avis: So this is the letter that we got from Wells Fargo. And it says they're discontinuing the line of credit and that starting in November we have to pay it back at 2 percent of the outstanding balance for 50 months, plus interest.

Translation: Wells Fargo cancelled Jeff and Avis' credit line and required them to pay back the $20,000 within four years. That means Avis and Jeff will see their monthly payments jump from less than $50 to several hundred, plus interest and fees. And here's the really weird part. Just four days before they got that letter, Wells Fargo had given Avis and Jeff a big mortgage loan. A loan they could no longer afford.

JEFF: Doing something like this just, boy.

AVIS: To say "We're going to give you a mortgage and then in five months we're going to make it impossible for you to pay that mortgage" is beyond belief. I mean, what kind of a business model is that?

The business model of a panicked industry, says Robert Manning, founder of the Responsible Debt Relief program. He says almost a trillion dollars in credit will disappear over the next year and a half, as banks shut down unsecured lines of credit and credit cards. And Manning says, high earners are getting hit, too.

Robert Manning: Today, everybody's at risk of losing their jobs. Higher income households owe more money and now the banks are concerned a high-income household's account, they would lose two, three, four times as much as a middle-income account.

Banks are trying to cut credit and shed risk so fast that one part of the bank -- like the mortgage part -- doesn't always know what another part of the bank is doing, says NYU economist Lawrence White.

Lawrence White: Banks are rediscovering that it's a risky world. I'm sure there's been some over-reaction. It's hard to not have an over-reaction after what we've gone through.

Wells Fargo told Marketplace it didn't single out Avis and Jeff; it discontinued their type of credit line entirely. Wells Fargo also said only a small percentage of its clients were affected. But Avis says the bank's actions have put her and her husband in financial distress. And now their lives will have to change, if they want to keep their house.

Avis: How is it going to change?

Jeff: We're still trying to figure that one out, actually, yeah.

Avis: This is such a shock. We felt that we'd already made the changes. Let's see: how often to we eat out? Once every couple of months? Jeff takes his lunch to work every single day. We don't have a fancy car, anything like that.

Avis says now she needs to get a job, if she can find one. And she and Jeff will have to drain their savings, or what's left of it, to pay off their mortgage and credit-line loans.

In Encinitas, Calif., I'm Stacy Vanek Smith for Marketplace Money.

About the author

Stacey Vanek Smith is a senior reporter for Marketplace, where she covers banking, consumer finance, housing and advertising.
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If you lower your credit limit then the healthiest utilization of that credit limit is lower (most credit experts on the net believe you shouldn't go above 30% utilization of the limit).

So if your limit goes down and you were only using 30% of it then you'll be using more than 30% and your credit score will go down the closer you get to 100% utilization.

Gary Mertz, why would anyone want to lower their limit and close their credit cards, unless you have more than about two or three? Even putting small purchases just to keep them active is a smart thing.

Credit cards are the best way to improve ones credit, but only if you treat it like cash and be 100% responsible. And never treat it as an emergency. Suze Orman can tell you a few things about that.

Checkout the credit forums like creditboards.com for more info.

Credit card companies are not your friends. I called one of my VISA credit card providers (FIA Card Services - used to be Wacovia) back in March to request a reduction in the interest rate. Their response was sorry we can not reduce your interest rate but we can reduce your credit limit. And they did. My credit limit was reduced from $28,000 to my then current balance plus $300. This was a reduction of about 70% in my credit limit.

I have not used this card since and every month I call FIA Card Services and request a further reduction in my credit limit equal to the amount that my most recent payment has reduced my card balance.

As soon as this card is paid off I intend to tell FIA to close my account and stuff the card where the sun don't shine. BTW I have had this card since 1991.

From the Random Info dept.:

Avis Durgan is famous in a rather unexpected way. For fans of old computer games, her name is in the code of every Sierra On-Line game made in the 1980's. Check out: http://en.wikipedia.org/wiki/Avis_Durgan

As you said, the credit card companies are doing it to everyone. I have two major credit cards with the same bank and have been an excellent customer. I received notice that they were reducing my credit lines on both cards to right above what I owed on them. This is after I worked to pay them down considerably. I called them and stated that I understood why they did it but the negative affect will come full circle. By paying down my credit cards I increased the gap between my debt and my available credit, this plays into your credit score. When the bank lowered my lines, that negatively affected my credit score, which in turn is reported back to the same credit card company, who then uses that credit score to determine my credit standing with their bank. All the rep at the bank had to say was, I work here and they did it to me too. On a good note, they did agree to lower my interest rate on my card since I was a good customer.

Unfortunately, that is the way the world is going. My father lost most of his/mine inheritance from very old telephone stock. Thankfully we have always been poor (money wise) but our house is almost paid off! My husband was a carpenter without steady employment but that always kept us in check about what we spent. Although we are in the poverty level I think we are in a better position then most. We live in a corrupt world today so we all need to be SUPER frugal now. Dad lost over a half million that would have come to me but o well. Just think of those in third world countries who have never had anything!

You know what, I am truly sorry for the position that Avis and Jeff now find themselves, no-one saw the crash coming.
That said, Jeff quit his job at Microsoft!!!! How much was he making there? They both took a very early retirement and that comes with substantial risks at the best of times. Did they really have enough stashed away to see them through their 80s or 90s without ever punching a clock again?
I hope they keep their perfect California beach house, but I won't be too sympathetic if they have to eat Ramen noodles to do it!I on't think they had really covered all the long term bases.

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