|by Brooke Kaelin|
Well folks, the economic crisis is starting to trickle down in a myriad of small ways. Banks have been hit especially hard, and many of them are tightening up in unexpected areas.
Several major credit card companies, including American Express and Bank of America have started reducing the credit limits on some of their customer’s credit card accounts – without warning.
The hard facts:
- Credit Card delinquencies are up 12% this quarter
- Credit card companies are beginning to cut back their approval rate for new lines of credit.
So, what does that have to do with your credit card company lowering your limit? Well, things are getting tight – very tight everywhere. Especially for banks.
There is a an overwhelming aura of fear in the financial market right now – anyone with a TV can tell you that. Lenders are beginning to decide that maybe they have been too generous with their offers of credit. And now, more than ever, banks are short on capital.
So they are reducing the available credit for many of their customers. It’s not just customers with low credit scores either. People with credit scores of 720 and above are still being affected. Business credit cards as well as personal credit cards are suddenly on the chopping block.
In a recent report by Javelin Strategy and Research (an advising firm for the financial industry) they found that 62% of credit card companies have cut back lines of credit to their existing customers. Sometimes reducing their credit lines by as much as half – that’s huge.
Can you prevent your credit limit from being reduced?
Not really. I wish I could tell you that you could, but at this point, you probably can’t fix things fast enough to sway a decision. Credit card companies are primarily going to base their decisions on several factors:
- How big your line of credit is - Banks can decide to cut your credit limit simply because they aren’t comfortable with the fact that you could call on that limit at any given time. If that’s the case, there’s really nothing you can do about it.
- Your past credit history with them - If you have made several late payments in the past, your bank could well decide that you may be able to borrow more than you can afford to pay back immediately.
- Your credit score - It is standard practice for banks to periodically review accounts, pull your credit score, and then make a decision about your account. What is happening is that a larger than normal number of accounts are being reviewed, and some of them are having their credit limits reduced based off of their behavior with other lenders, or the total amount they owe on all their credit accounts.
So, what can you do?
Keep your credit card balances as low as possible – This is one thing that will help you keep your credit score as high as possible. Also, in the event that your available credit is reduced, it will not affect your debt-to-credit ratio nearly as much as it would if you had been carrying a high balance. For more info on the Debt-to-credit ratio, you can check out our article “The FICO Score Breakdown” which talks about how your credit score is calculated.
Pay your bills on time - Again, this keeps your credit score up, and doesn’t invite trouble. Why tempt the bank to lower your limit, or raise your interest rate if you don’t have to?
Keep an eye on the mailbox - Credit card companies can make changes in the terms and conditions any time they want to – but not without notifying you first. If your credit limit is going to be reduced, or your interest rates raised, then by law they have to give you a notice of the changes.
What should you do if your credit card company does unexpectedly lower your limit?
First, be aware of the possible one-two punch - They lower your limit below your current balance. This immediately puts you over the limit. Then they tack on over the limit fees, and possibly raise your interest rates because you are now “over the limit” and in violation of your “contract”. Obviously, this would be a rare, worst-case scenario. If it does happen, call them immediately and harass them until they remove those fees and reduce your interest rate. You will have to speak with a manager.
Call your credit card company and request that they raise your credit limit again - Let’s face it, they probably aren’t going to be willing to do this, but it never hurts to ask. If you have a long, and positive payment history with them, then you are in a good position to negotiate. If they cannot raise your credit limit, then try getting them to at least lower your interest rate, or waive your annual fees.
Shop around – If your current credit card company has decided it no longer wants your business, there are still plenty of other banks out there that do! Try shopping around for balance transfer offers, or cards with lower fees that would benefit you more, or have a larger line of credit.
Lastly, keep in mind that this isn’t going to happen to everyone. It’s just happening to more people now than it ever has because the financial markets are in such a mess. Things will even out and return to normal eventually. Just look out for yourself and your lines of credit right now. Keep your balances low, and even if it does happen to you it should not hurt your credit score overly much.
If your available credit does suddenly decrease, then be sure you pull your credit score. Take a look at it and make sure that you are in a good position to apply for a new credit card before you try to replace the available credit that was lost. No sense in lowering your credit score with inquiries if that was why your bank decided to decrease your limit in the first place.
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