Financial Literacy - Credit savvy
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Coping with lower credit card limits

Be wary of closing accounts

If you close your account in retaliation to the creditor, you may only be hurting yourself.

One factor that affects your credit score is the length of time your accounts have been open, according to FICO. An account in good standing will fall off the credit report within 10 years. When it drops off, you could decrease the average of your accounts.

Rita Cheng, a Certified Financial Planner and financial adviser at Ameriprise Financial Services in Bethesda, Md., says she thought about closing her account after Citibank cut her credit line and almost doubled her interest rate.

"I've been a customer since 1990. I never pay late and my credit score is outstanding, so I thought this was crazy," Cheng says.

Cheng knew that closing her account in frustration could ding her credit score. Instead she made several calls to Citibank and worked her way up the customer service chain until she reached someone willing to work with her.

"I actually got a credit line increase and was able to get 2.99 percent (financing) for nine months on all new purchases," she says. "I did not have to apply for a new card, have people look into my credit report or get testy."

If you decide to close an account, make sure you have the financial wherewithal to pay off a significant portion of any balances that remain on other cards; otherwise, your utilization will go up.

If you don't make any payoffs, you may cause a ripple effect with other card issuers that suddenly perceive you as a bigger risk, and you may end up with further credit limit reductions or rate increases.

Save more, carry less debt

For some consumers, lower card limits may be a blessing in disguise. Using cash or a debit card rather than a credit card certainly will help boost your bottom line by limiting your debt exposure.

Tim Kolk, managing partner of credit card consulting firm Brookwood Capital, says groups that are more susceptible to getting in over their heads in credit card debt likely will benefit most from lower card limits.

"I think some groups, like students, are still trying to figure out how this stuff works," he says.

Kolk believes other people, such as recent immigrants and seniors on fixed incomes, are susceptible to going over their limits and getting slammed with fees and higher interest rates because they don't fully understand the way the credit card industry works.

"Overall, our society has abused credit," says Curtis Arnold, founder of Cardratings.com. "For folks carrying debt, reduced credit lines should translate into lower balances and lower consumer debt, which is a good thing -- no doubt about it."

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