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Cutting our credit in half has got to hurt

We all know that credit cards are slashing credit limits and closing accounts, even for customers who’ve never missed a payment.

But you may be surprised to hear just how much credit the banks that issue Visa and MasterCards, and credit card companies such as American Express and Discover intend to take away from us.

More than half is the astounding answer from Meredith Whitney, the Wall Street analyst who became famous for predicting the current banking crisis.

In an opinion piece she wrote for the Wall Street Journal, Whitney says consumers have used about $800 billion of their $5 trillion credit lines.

But the amount of available credit was reduced by $500 billion in the final three months of 2008 and by the end of 2010 Whitney expects the amount of credit available to consumers on their cards will be down to about $2.3 trillion.

Besides the obvious — we’ll be able to buy less — the campaign to slash credit limits is also starting to hurt credit scores according to USA Today.

That’s not surprising, since 30% of every FICO credit score is based on how much available credit has been used. Fair Isaac Corp.’s formula penalizes consumers who have tapped more than 50% of their available credit. Slash the amount of available credit and you’ve got to push more consumers over the 50% threshold.

Another 15% of the score is based on how long credit card accounts have been open. So closing a long-held account hurts too.

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