During the United States recent bailout the Fed understandable
did not want the public to know which banks were in trouble and in
order to hide the identities of those who needed help our Fed is
said to ‘having forced’ tarp funds (especially when not needed such
as Wells Fargo Bank) down many of our solvent banks throats.
When banks accepted those funds, even against their will,
there was a drastic increase in hurdles that they had to overcome
in order to loan that money to consumers or to pay that money back
to the Fed immediately which is what most banks wanted, but weren’t
able to do. I suppose that our Fed would not want solvent
banks to pay back the funds right away because then it would be
easy to see which banks could not repay quickly and therefore it
would identify who was in trouble.
Banks that did not accept tarp funds would be incredibly
burdened with increased reserve requirements (discussed later) and
other negative impacts which would adversly affect their ability to
do business reasonably. Also, these tarp funds were much more
difficult to loan to borrowers because often times a solvent banks
interest rate on conventional funds were much lower than the tarp
funds interest rates! Banks were forced to take these tarp
funds, not allowed to pay them back without harsh penalties, and
then they couldn’t loan the funds. Forcing these funds upon
banks seems to be a reasonable business plan only for the banks
that were about to go under. It seems odd to level the
playing ground for those who aren’t succeeding.
When a bank gives you a $10,000 credit limit they must keep
reserve requirements on hand for your possible future spending.
When their reserve requirements are adjusted negatively
(which was the threat for banks that did not accept tarp funds)
they must typically reduce your credit limit – often times to the
amount of your current balance. Those who already have high
balance to credit limit ratios are affected very little but those
who are more careful with their credit and keep much lower debt
ratios can be and have been affected much more. Think About
This! What happens to your credit score when your available
credit line immediately becomes equal to your balance? A
month ago your balance was $3000 and your credit limit was $10,000
which means your debt ratio for this tradeline was 30%. Now,
imagine your credit limit has been substantially reduced by 70% and
your debt ratio for this tradeline is now 100%. Your credit
limit and percent of credit used are definitely two important
factors for your credit score.. Have any of your creditors
reduced your credit limits? It’s happened to most everyone I
know. Our Nation’s FICO scores are currently under siege.
Many creditors did not do this because they wanted to but
simply because they were forced to adopt new regulatory guidelines.
As a whole – our credit scores have decreased, against our
will.
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