The financial services industry is notoriously risk-averse, especially with its own money.
Until recently, as unemployment figures hit record lows and the stock market hit record highs, financial institutions were pushing new credit cards, high credit lines, and easy-term loans.
But, enter a pandemic and watch how fast the goodwill dries up.
The economy has been running on “essential” fumes for a few months. Granted, nearly 40 million jobs have been lost in the U.S. And no one knows how the future will play out.
But not everyone is under financial duress.
Some people simply want to juggle assets in the face of inconvenient external factors. And that juggling may require some bridge money to minimize damage.
The story of a wise widow:
Each year, a retired widow named Sylvia generates some of her income for living expenses with the Required Minimum Distributions (RMDs) the IRS tables say she has to take. Another portion comes from selling a pre-determined part of an investment portfolio. Her retirement planning has been thorough and – so far – successful.
The CARES Act has waived the RMD requirement for 2020, which is good news for many people. But Sylvia needs to withdraw those funds anyway. Yet the value of her retirement accounts and her investments has dropped in recent months. (The Dow was at 28,462 on December 31, 2019, and has hovered below 25,000 during May, for a loss of about 13 percent.) And the forecast for the remainder of the year is unclear.
Rather than lock in the loss by selling assets to cover her living expenses, Sylvia counts on drawing from a personal line of credit she established a few years ago. Because she has excellent credit scores, its interest rate is low. She also has large credit lines available on several rarely used credit cards.
Her intention is not to try to time the stock market, but those tools should give her some flexibility to minimize the impact of the pandemic on the market.
Imagine Sylvia’s shock when she discovers that her credit line is not available, that the credit limit on some cards had been lowered, and that other cards have been closed altogether.
What happened to Sylvia’s credit?
Sylvia had never used the line of credit and, since you don’t pay interest or make payments unless you do, it had never generated any revenue for the lender. So, when the “draw” period of the credit line ended recently – and transitioned to the “repayment” period where you may no longer borrow against the credit line – no one bothered to suggest she open a new line of credit.
As for her credit cards, Sylvia is caught up in what is affecting so many other Americans. According to a survey reported in early May by Lending Tree’s CompareCards, “nearly 50 million American credit cardholders said they have had their credit limit slashed or their card closed in the past 30 days.”
Again, because banks make money on cards when they’re used, either through interest or fees, they make no money if they aren’t. And, if issuers are looking to minimize their exposure, those dormant cards are more likely to be considered expendable.
And, are issuers required to inform cardholders that they’re reducing credit limits? CompareCards found that 41% of Americans are unaware that their credit card issuer can cut credit limits without notification. Only if lowering the credit limit is going to throw the cardholder into an over-the-limit situation will they want to notify the customer. Why? Because the fee can only be charged if the issuer has provided a 45-day notice.
So, what is the cautionary message?
It’s not wise to take a passive attitude toward finances when so much is changing in the marketplace. If you are counting on any tool as part of a strategy, stay proactive.