Credit limit reductions were common in 2009, as credit card companies acted preemptively to limit potential exposure to customers who might start using available credit to pay for living expenses. This led to a wide range of problems and the most heart wrenching credit card complaint ever received at Smart Balance Transfers. Recently, complaints about credit limit reductions started trickling in. If past is prelude, it is very likely that an epidemic of credit limit cuts is on the horizon.
There are many reasons to fear credit limit decreases. Not only can they leave you without a credit card safety net, they can also lead to substantial reductions in your credit score. While credit score issues can be fixed over time (and avoided to a certain extent), a reduction of a credit card limit at the wrong time can be devastating. A horror story that highlights these issues was relayed to us from a visitor named Patti in October of 2009.
Patti was on her way to visit her terminally ill father. Before leaving, she contacted her credit card company to check her available credit, as she would need her card to rent a car. Confident she would have no problem, she boarded a plane and headed to the rental car desk. And then another. And then another. No one would rent her a car because her credit limit had been cut below the level needed to rent a car, and you can’t rent a car without a credit card.
Ultimately, Patti had to use a range of public transportation to get to the hospital. But it was too late. Her father had passed away while she was en route. Patti missed a final chance to see her father because her credit limit was reduced. (To read Patti’s full story, please see this article)
While this is an extreme situation, similar issues have surely happened to many. And the only defense is to be prepared. Preparation ultimately means having at least two credit cards with available credit, especially when travelling. Preparation also means having cash available at all times so as not to find oneself without the means of paying for everything from a dinner out with friends to the baggage fees when returning from a vacation.
If you’ve recently experienced a credit limit reduction and need available credit, it is essential to apply for a new credit card as soon as possible. If, for example, you had a $900 balance on a credit card with a $3,000 limit and that limit was cut to $1,000, you may experience a significant drop in your credit score. This is due to the weight given to credit utilization ratios. This element accounts for 30% of your credit score and if it is high (i.e. you are using 90% of your available credit), it can lower you score and make you appear maxed out to other lenders. Thus, if you apply for a new credit card before your lower limit is reported to the credit bureaus, you will likely have a much better chance of getting approved for a new card.
Just as interest rate increases were all the rage last year, credit limit cuts will likely become the new black in the credit card world. Preparation and fast, decisive action are the keys to getting snared by this tactic.
-Jenn Davide
For more information on what you can do when you credit limit is decreaed, please see the aptly titled article, What To Do When Your Credit Limit is Decreased.
For information on current credit card offers, please visit the 0% credit card comparison section of Smart Balance Transfers.
Related Posts
- New Credit Card Rules and Interest Rate Reductions
On August 22nd, the second phase of the CARD Act was enacted. Unlike the first set of new credit card rules that took effect in February, the newest credit card rules won’t have a huge impact on the wallets of most people. One rule limiting penalty fees will help those who accidentally (or habitually) make [...]...
- Credit Card Complaints in June 2010
Credit card complaints received at Smart Balance Transfers have continued to decline. After the implementation of major pieces of the CARD Act on February 22nd, credit card complaints dropped considerably. This pattern has held over the past three months. Much of the decline in credit card complaints is likely due to the fact that credit [...]...
- Credit Card Balance Transfer Fee Report for August 2010
As a result of increased balance transfer fees on a number of Citibank credit cards, the average transaction fee charged on balance transfer offers lasting 12 months or more increased once again in July to 4.1%. Two Capital One credit cards, the Platinum and Platinum Prestige card, offered the lowest transfer fees at 3% on balance [...]...
- Balance Transfer Fee Credit Card Report for June 2010
During June, all the major credit card companies continued to charge three to five percent balance transfer fees on 0% APR balance transfers with no maximum fee cap. While some companies are offering low balance transfer fees of 3%, many are charging 4 and even 5%. Citibank and Capital One credit cards offer 0% balance transfers with [...]...