Credit card companies have been cutting credit limits for the past six months. For most, credit limit cuts come as a complete surprise and cause substantial issues. One recent visitor who had her credit limit cut found out when a cash advance check mailed to her from her credit card company bounced. A second was given two reasons that seemed to be picked out of a hat: payments were low compared to balance owed and she had “no mortgage loans.”
According the latter credit limit victim, she paid her bill monthly. So reason one was irrelevant. And a mortgage? This person is a graduate student and didn’t plan on taking on a mortgage anytime soon. And besides, since when did owning a home become a pre-requisite for having a credit card? Seriously, credit card companies really are picking arbitrary reasons out of hats.
Angered by a near 50% credit limit cut, this visitor closed her credit card account. And, unfortunately, this could really hurt her credit score. For starters, she has now shortened her credit history, perhaps substantially, because she closed one of her earliest accounts. And, having not applied for a new credit card first, she may find it increasingly difficult to get a new credit card in the near future. This, in turn, may keep her credit score low and increase the rates she’ll have to pay when she actually wants to get a mortgage.
This credit limit cut was, at least immediately, less costly than the woman’s whose limit was cut somewhere between the time she was sent a cash advance check and she used it. This woman was deluged with late fees, overdraft fees, and stuck with an empty bank account. To make matters worse, the reason her bank account is empty is because she used her cash to pay down the high interest balance she had on the credit card whose limit was cut. So much for credit cards being “everywhere you want them to be.”
Now, I realize these two vignettes don’t address a broad range of reasons for credit limit cuts. Such was not my intent. What’s important to glean from these situations is the fact that credit limit cuts are both arbitrary and inexplicable. They can occur at any time and for no apparent reason (and no good reason either). As credit cardholders, we should all be prepared to have our credit limits reduced to zero and spend accordingly.
And, while credit card limits were never as good as money in the bank, they must now be discounted as emergency funding sources. Cash has always been king, and cash is truly the new credit.
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