credit cards

increases in credit limits without further credit assessment

It’s a familiar story. Your monthly credit card statement arrives and you realise just how much you’ve actually spent over the past few weeks. But after checking off all your transactions (in the faint hope that at least some of them aren’t really yours), you read something like:

‘GOOD NEWS!! – your credit limit has just been increased to £XXX’. So with summer just around the corner, why don’t you treat yourself to ….’

But is it really such ‘good news’ for the customer? Should credit card companies increase card limits without even asking? And how do they go about deciding what the new limits should be?

Of course, these questions are not just confined to the UK. A couple of months ago, the Australian Banking Ombudsman issued a bulletin on the subject, in which he said:

‘Often the increase in credit limit is based on an assessment of the repayment history on the account. As a result, a customer who has managed consistently to meet the monthly minimum payment may be offered a limit increase, notwithstanding the fact that the customer has no capacity to repay the whole increased amount.

This office takes the view that increases in credit card limits ought to be assessed in the same manner as the initial granting of credit. Accordingly, if no assessment of the capacity to repay is undertaken and it is found in an investigation that the customer could not do so, we may reach a view that there has been maladministration.’

Back here, the Task Force on Tackling Overindebtedness – set up by the Department of Trade and Industry (DTI) and including representation from, among others, the Office of Fair Trading – expressed concern last year about a number of consumer credit marketing techniques. An apparently overt trend towards emphasising the ease, speed and scale of credit available seemed to run counter to messages about responsible lending.

The DTI then set up a working group to examine these issues in more depth. By the time this edition of ombudsman news goes to print, the working group will probably have reported back to the Task Force. We have not seen the working group’s report but we believe it is likely to include a number of recommendations relating to unsolicited overdraft offers, as well as to increases in credit card limits. In particular, it may well suggest that these should only be made after pre-screening customers each time an increase is proposed, and that customers should be made aware of their right to reduce or refuse an increase.