News of credit card companies slicing the credit limits on consumer and small business credit cards has been in the news for quite some time. However, a report yesterday discussed on CNBC and noted in today’s Wall Street Journal, an astonishing 60% of credit card companies are slashing consumer credit lines as a result of the continuing credit crunch.
Cutting credit limits on consumers creates a number of problems beside the obvious. Here, I’ll do my best to describe the complicated effects lowered credit limits can have on credit scores, and thus the availability and cost of credit for everyone.
Let’s begin with the obvious. Having your credit limit reduces your ability to spend. Also, many people who have their credit limits cut are often sent an ultimatum from their credit card company: close your credit card account and keep your current interest rate or keep it open and we’ll raise your interest rate.
Many people opt to do the second, and consequently, their credit report shows that they are using all of their available credit. Even if you just have your credit limit cut from, for example, $10,000 to $5,000, this can negatively impact your credit score.
In the first scenario, where your account is closed, your credit score may be adversely effected because it will appear that you are “maxed out”. In the second scenario, where a credit limit is cut in half, a balance of $4000 would now mean you are using 80% of your available credit. These factors are strongly considered in not only your credit score, but in the way your credit report is viewed.
Having less available credit lowers your credit score, sometimes dramatically. This, in turn, will make it harder to get a new credit card, to refinance your current credit card debt, or qualify for a good mortgage or car loan rate.
Unfortunately for consumers, this raises the cost of borrowing money across the board. However, there are a few remedies that, if taken quickly, can help ease the pain and prevent issues. First, if you have money available, pay down your reduced limit credit card so that the balance is less than 50%. And, even if you can do that, get a new credit card before the credit bureaus update your score. This tactic is especially useful for people who cannot pay down their debt levels below 50% of the available credit balance.
Another option is to try to get a 0% balance transfer. This will not only reduce your current interest costs, it can help you pay down your debt faster and help your credit score.
The impact of credit limit decreases are clearly troublesome. And the repercussions can raise the cost of borrowing money across the board. In these tough times, securing a 0% interest rate is becoming difficult, and if you don’t have one now, its better to act sooner rather than later.
For more information on 0% credit cards, please see the appropriate section in the credit card comparison section of our website.
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