Financial Literacy - Credit savvy
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Coping with lower credit card limits

It may be only a matter of time before you get a notice in the mail stating that your credit card borrowing limit has been reduced. Already, some cardholders have had their credit lines slashed despite spotless payment histories and excellent credit scores.

About one in five cardholders had their credit limits reduced recently, according to a July survey by Consumer Action, a San Francisco-based consumer advocacy group. Roughly the same percentage of cardholders also reported being very close to their limit on at least one credit card, according to that survey.

Bankrate's own survey indicates fewer Americans have been affected so far -- 6 percent of respondents said their credit line was cut, up slightly from 5 percent in August. But some financial analysts predict the consumer credit contraction is on the verge of becoming severe. Meredith Whitney, a banking analyst at Oppenheimer & Co., predicts card issuers will cut credit lines by $2 trillion-plus over the next 18 months.

"Our surveys have been showing this as a practice (lowering card limits) for at least three years," says Linda Sherry, a spokeswoman for Consumer Action. "I think it is stepping up somewhat in this economy."

Some of the factors that could trigger a credit line decrease include a decline in cardholder credit scores, late payments and account balances that are too close to credit limits, according to Consumer Action's 2008 credit card survey.

Federal law requires that you receive a notice in writing of a change in your annual percentage rates (APR) at least 15 days' prior to the effective date, but the 15-day rule does not apply to credit limit changes.

If your credit card company lowers your limit, all is not lost. You may have options, including persuading the company to reverse its decision.

Make the best of low limits
  1. Complain diplomatically
  2. Transfer your balance
  3. Search beyond big banks
  4. Use credit more wisely
  5. Be wary of closing accounts
  6. Save more, carry less debt

Complain diplomatically

Johann Beukes, a software engineering manager for Bankrate Inc. based in North Palm Beach, Fla., logged on to American Express' Web site recently to make a payment and discovered his credit line had been reduced by $5,000, despite the fact that he's been a cardholder for more than 10 years and has a credit score north of 800.

"I called them up the next day and asked why they were doing this, since we've never had a late payment," he says.

After lodging complaints with three company representatives, Beukes finally was told that his credit line was lowered because American Express wants to reduce its risk because of the credit crisis. Nothing personal.

Beukes gave up trying to restore his credit line -- for now. "I was told that I should call back again in about six months and request an increase," he says.

While some card issuers won't reverse their policy, it doesn't hurt to try.

"The technique of complaining in this current environment is particularly effective because the card industry has a black eye right now," says Curtis Arnold, founder of Cardratings.com.

Arnold estimates it costs around $300 in marketing fees to replace a lost cardholder. He says you should ask to speak to a manager if you find you're not getting anywhere with a customer service representative -- just be sure not to lose your cool. As the saying goes, you catch more flies with honey than vinegar.

There's no guarantee it will work, but if you're a good customer, your chances of success are better. A good payment history with your card issuer, good credit and the ability to pay off your balance could tip the exchange in your favor. So can a mild threat.

"If you threaten to take your business elsewhere, they're usually going to listen," Arnold says. "They're hurting financially, and they don't want to lose your business."

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Transfer your balance

"If you have excellent credit, you may be able to get a balance transfer deal to another credit card with a higher limit," Consumer Action's Linda Sherry says.

Bankrate can help you find a balance-transfer deal based on your credit rating.

Use balance transfers to your advantage, especially if you can qualify for a zero-percent or low-interest rate offer. But make sure you understand how balance transfer fees work and how long an introductory rate lasts.

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Balance Transfer Cards 15.66%  0.01 15.67%
Cash Back Cards 16.36% --0.00 16.36%
Low Interest Cards 10.86%  0.01 10.87%
 
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