Although we’ve been following credit limit cuts for the past few months, recent developments continue to shock us. At first, the primary victims of credit limit cuts were consumers with marginal credit scores and high credit utilization rates, factors that made these consumers riskier for banks.
Recently, however, we’ve been hearing from consumers with good credit and low credit limit utilization who’ve had their limits cut, oftentimes dramatically. A common tactic among credit card companies has been to offer consumers ultimatums: close your account or accept a doubling (or tripling) of your interest rate. Recently, however, a much more insidious trend has taken hold.
The new trend, which we warned consumers about a few weeks ago, is to cut credit limits to within a few hundred dollars of current balances. This tactic is the most vulgar and abusive we’ve seen. In a nutshell, it is a disgusting attempt by credit card companies to charge fees and raise interest rates. Here’s a scenario that is unfortunately becoming commonplace:
A consumer, we’ll call her Fran, has a $3,000 balance on a credit card with a $10,000 limit and a 720 credit score. On Monday, Fran gets a letter from her credit card company informing her that her credit limit has been cut to $3,100. Fran fortunately has a few hundred dollars of available cash, so she puts a check in the mail for $500. However, Fran has her cell phone bill set to auto-pay, and before that check arrives, her credit card is charged $101, putting her over her credit limit. Going over the limit leads to Fran being charged a $30 late fee.
And that’s just the beginning. Because the terms and conditions of just about every credit card allows the company to raise her interest rate if she defaults (doesn’t pay on time) or goes over the limit, Fran’s interest rate is raised from 12% to 25.99%.
Now, Fran has a monstrous interest rate and no credit available. And this is just the beginning. In a few weeks, her credit card company will report to the credit bureaus that she is using 75% of her available credit, as opposed to 30%. This will cause her credit score to decrease substantially, thus making it difficult for her to refinance her debt with a 0% balance transfer. If she doesn’t pay off her balance immediately, she will spend over $400 more in interest in just one year at the higher rate.
Fortunately, there is a solution for the Fran’s of the world. However, it requires fast and decisive action. Here’s how you can turn a credit card nightmare into a manageable situation:
- Do a 0% Balance Transfer Immediately: If you wait until your credit score is updated to reflect your lower credit limit and higher credit utilization, there is a very good chance you may not be approved for a balance transfer credit card. However, if you act immediately, your credit score will remain where it is, vastly improving your chances of getting approved. This will not only save you hundreds of dollars in interest, but it will also help your credit score, as you will have more credit available.
- Do Not Close Your Credit Card Account Unless Forced: The ultimatums credit card companies are giving consumers are truly sickening. However, if your credit card company does not threaten to raise your interest rate, keep your credit card open, as closing a credit card account can have a very negative impact on your credit score.
- Pay Down Your Credit Card Debt: Although easier said than done, paying down at least a portion of your debt can help you protect your credit score. For example, if Fran were to trim her credit card debt from $3000 to $1400, her credit utilization would be under 50%. This is much better than 90%.
Ultimately, upstanding, honest citizens are paying for the mistakes made by irresponsible banks and irresponsible consumers. Most of the people suffering through credit limit cuts never took out sub-prime mortgages they couldn’t afford or lied on loan applications. Unfortunately, the risk assessment tools used by credit card companies don’t seem to know the difference between honest, hard working Americans and our dishonest, liar-loan accepting brethren. The best we can do is utilize the resources available to us to lessen the fallout of other people’s mistakes.
If you’ve fallen victim to a recent credit limit cut or interest rate increase, you can take action by getting a new credit card with a 0% interest rate on balance transfers. For more information or to apply online, please see the balance transfer offers section of Smart Balance Transfers, where you can compare deals and apply online for approval.
If you want see how your credit score has been effected by a recent credit limit cut, you can find a number of free credit report offers in the appropriate section of our website as well.
