Over the past four months, I’ve been contacted by a lot of consumers who had their credit card limits decreased. Many of these consumers had their credit limits reduced to as little as $100 more than their current balance, putting them at risk of over the limit fees and penalties. And, while the old adage is adding insult to injury, the real issue here is adding injury to the insult of getting your credit limit decreased.
When a credit card company cuts your credit limit, this can have a huge, negative impact on your credit score. The reason lower credit limits can rapidly erode your credit score lay in the heavy weighting given to the utilization of available balances. For example, a person with $900 in credit card debt and a credit limit of $10,000 gets a credit score boost because they are using less than 10% of their available revolving credit. Even at 30%, your credit score isn’t negatively impacted. However, when a credit card company swoops in and cuts your limit to $1100, you are now using nearly 90% of your available credit. In other words, you’d be maxed out.
Things Are Getting Worse
The first people to get stung by credit limit reductions were those on the border of good to average credit. These consumers started getting hit soon after the collapse of Lehman Brothers in the fall of 2008. Now, however, we’re getting emails from customers who have good credit, always pay on time, and aren’t even close to maxed out. And the trend is getting worse.
A www.bloomberg.com article penned by Alexis Leondis contains this startling observation;
“About 45 percent of U.S. banks reduced credit limits for new or existing credit-card customers in the fourth quarter of 2008, according to a Federal Reserve January survey of senior loan officers. Financial institutions may slash $2 trillion in credit- card lines in the next 18 months, Meredith Whitney, a former Oppenheimer & Co. analyst, wrote in a Nov. 30 report. “
Based on a number of email and blog comments we’ve received, the timeline for these credit limit cuts has probably decreased from 18 months to today.
What You Can Do When Your Credit Limit is Decreased
1. Act Quickly: When you learn of a credit limit cut, especially one that puts you at or near your credit limit, you need to move very quickly or you risk falling prey to numerous traps. Here’s one example: Let’s say your limit gets cut to $100 more than your current balance, and you have an auto-payment set up for $101. When that goes through, you’ll not only go over your limit (and get hit with a fee) but also, you will have given the credit card company a legal and legitimate reason to raise your interest rate.
If you fall into this position, make a payment to your credit card online or by phone immediately and cancel any auto pays you have in place.
2. Apply for a New Credit Card: It takes a few weeks for changes by your credit card to hit your credit report. If you apply for a new credit card immediately, you may be able to get approved before your credit score decreases. This will not only give you access to credit, but it could also help your credit score, as you will now have more credit available to you (For information or to apply for a new credit card, you can compare offers in 0% APR credit card section of this website.)
3. Pay Down Your Credit Card Debt: While obviously easier said than done, paying down you debt will help limit the damage done to your credit score. However, there are a few things to be careful of. For example, if you think you will need this money in the near term, you’re better off holding on to it and worrying about your credit score later.
4. Monitor Your Credit Closely: If you’ve recently been clobbered with a credit limit decrease or another adverse credit event, you may want to check out your credit score. There are a number of websites that offer free credit monitoring trials for 30 days that provide you with access to all three of your credit reports and scores. These sites also have tools that enable you to estimate how certain events, such as getting a new credit card, will change your credit score.
Unfortunately, all consumers are now at the mercy of our desperate banks. In the short term, its always best to plan for the worse. Today, that means staying on top of your credit card accounts, paying down debt, and vigilantly defending your credit score. Getting your credit limit cut in times like these is the last thing most of us need. However, smart, decisive action can help you avert the worse.