Since the implementation of the new credit card rules one month ago, consumer complaints about credit cards have been centralized on a single issue: credit limit cuts. Ironically, many of these cuts are occurring to people who have just paid down a substantial portion of their debts. But the fear of a credit limit cut shouldn’t deter you from reducing your credit card debt.
From a common sense point of view, reducing the credit limits of people who pay down credit card debt makes little sense. After all, these people are demonstrating the ability to pay their bills and a desire to reduce their debt. One would think these types of customers would please banks. Yet, in the perverse world of post-CARD Act lending, repaying credit card debt has become a trigger for painful credit limit cuts.
Nick, a frequent poster on Smart Balance Transfers, waited until after the CARD Act took effect to pay down a chunk of his credit card debt. A few days later, a letter arrived in the mail informing him that his credit limit had been cut to just $200 above his current balance.
Emma, another visitor who wisely decided to reduce her outstanding debt, saw her credit limit decreased from $3,000 to $800 almost immediately after her payment cleared. Unlike Nick, she learned of her decrease when her credit card was denied, causing her significant embarrassment.
Stories like Nick’s and Emma’s are increasingly common this year. Unfortunately, with few exceptions, most people are likely better off with less debt and a lower credit limit. However, if you are relying on your credit limit as a cushion and using necessary cash reserves to repay your credit card, you may want to pay it off more slowly. This way, you won’t be cash poor and credit poor if an unexpected expense catches you off guard.
Lastly, if you have good credit and want to make sure you have an available credit line after you pay your debt, consider applying for a new credit card before paying down your old one. If you can get approved, this can not only protect you against a possible credit limit cut, but also the damage that cut could cause to your credit score.
-Jeffrey Weber
For more information on what to do when your credit limit is decreased, please see this article. For information and applications to 0% interest credit card deals, please see the homepage of Smart Balance Transfers. There, you can compare credit card offers and apply online.
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