credit cards

Why credit limits get cut

Thursday, Nov. 12
Posted 11 a.m. EST

Bankrate reporter Leslie McFadden contributed this entry.

If you haven't seen your credit card limit slashed or one of your sock-drawer cards canceled, consider yourself lucky. An August report from credit score firm FICO found that about 33 million cardholders saw their available credit cut between October 2008 and April 2009. Only 9 million of those folks triggered the drop because of negative information in their credit report.

It's an unfortunate fact that issuers may lower your credit limit or close your account for reasons that have nothing to do with your credit score. Some triggers aren't even under your control. At a Credit.com seminar held in New York this week, President of Consumer Education John Ulzheimer, a former executive at FICO and consumer-reporting agency Equifax, laid out six reasons issuers cut limits and close accounts.

Possible triggers:

1. Your credit score dropped. Your score fell below the issuer's minimum score threshold.

2. New information came onto your credit report. The information could be negative, such as delinquency or an increase in credit card debt, or just new -- like a new credit card appearing on your report.

"The bureaus actually have services that will notify lenders when something like this occurs," says Ulzheimer. He says these "trigger programs" allow lenders to set alerts for particular activities on credit reports.

Having too many accounts in dispute at the credit reporting agencies is a newer trigger, he says. Because disputed data isn't included in credit scoring, scores can be temporarily and artificially inflated while the information in question is investigated.

3. Your community is in dire straits. Lenders may be risk-averse to borrowers living in areas where home values have dropped disproportionally or the unemployment rate is too high, such as Detroit and Phoenix.

4. Your financial status has (or is about to) changed. Divorce, job loss and pay cuts could signal potential payment problems down the road. Ulzheimer says lenders can become aware of money problems when a consumer calls to fight a rate increase or request a credit limit increase and reveals red-flag information.

Unless you're calling about a hardship program, don't mention you've been laid off.

"Refocus the conversation on why you called in the first place. It wasn't to talk about your job or your marital situation."

Lenders may also target accounts for unprofitability. Inactive, under-used and paid-in-full accounts can get punished.

5. The issuer makes a general decision about profitable accounts. The bank brands your account as unprofitable based on the terms of your account, or because the deal with a rewards partner changed.

6. Your payment and/or spending behavior changed. Drastic changes in payment and spending habits can signal financial trouble. For instance, if you start to revolve a balance when you used to pay in full or you miss a payment. Ulzheimer says swiping credit cards at higher-risk merchants, such as massage parlors or marriage counselors, and taking out cash advances often "are usage patterns that would be concerning to some issuers even if you've made your payments all on time."

So, there you have it. Pretty much anything you do as a borrower -- or don't -- can prompt your issuer to clip or dump your account. There are no surefire ways to avoid a spanking. What's more, the Credit CARD Act of 2009 doesn't require 45-day advance notification for either change and you can't opt out.

What should you do? Get in a good, defensive position. Pay down balances. Don't close accounts, unless necessary. Rotate your cards so that each one gets used once a quarter. Make sure you pay on time and keep spending reasonable. Order a free credit report every four months from AnnualCreditReport.com and dispute inaccuracies. Federal law entitles you to a free credit report from each major credit reporting agency -- Equifax, Experian and TransUnion -- every 12 months.

If your limit or account does get canceled, the loss of available credit can damage your credit score. If you can't take a score hit, Ulzheimer says people must replace the lost limit by decreasing another balance by the same amount or get a new card.

Shop for a low-interest credit card on Bankrate.com

Questions? Comments? E-mail plastic_rap@bankrate.com.

Read all of the Plastic Rap blog entries.

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