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.
- Complain diplomatically
- Transfer your balance
- Search beyond big banks
- Use credit more wisely
- Be wary of closing accounts
- Save more, carry less debt
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.”
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 experts can help you find balance transfer credit card deals 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.
If your credit card company charges 3 percent to transfer $5,000, it costs you $150. If you don’t pay off the balance before the introductory period is over, you’ll end up paying interest on that $150 as well.
Consider dusting off an alternate credit card if it has a favorable interest rate and a low balance.
“If you already have another card you are saving for a rainy day, use it occasionally, as it might not be renewed if it is inactive for long periods of time,” Sherry says.
Make sure you read and understand the terms of any credit card offer. One late payment could result in your introductory rate skyrocketing to a much higher variable rate or a default interest rate.
Search beyond big banks
Despite the credit crunch, there’s a tremendous amount of competition for good-quality accounts, according to Tim Kolk, managing partner of credit card consulting firm Brookwood Capital.
If you’re unhappy with how you’re being treated by your present credit card provider, you can sift through a wide variety of consumer plastic in Bankrate’s credit card database to find a card that meets your needs.
There’s a catch, of course. Your consumer clout will depend on how good your credit score is. In today’s environment, you’ll need a score of at least 700 to get the best credit card deals, Kolk says.
Make sure you carefully monitor any offers that arrive in the mail and don’t hesitate to use a little legwork on top of an online search. Sometimes the best deals can be found right in your own neighborhood.
“I think someone who is having a little trouble with a major national card issuer would be well served to go to their local banks and credit unions,” Kolk says.
He says local banks and credit unions tend to know their customers better, and they’ve historically had better credit performance — meaning fewer defaults — than the big credit card issuers.
“For a decade, credit union charge-off rates were about 2 percent, when big banks went from 4 to 6 percent or 7 percent and bounced around. So that’s a pretty compelling advantage,” he says.
Learn to use credit more wisely
“The bottom line is, credit card companies are tracking our spending habits, our debt, etc. Consumers don’t need to freak out about that, but we do need to proactively manage our credit more than ever,” says Curtis Arnold, founder of Cardratings.com.
If the limit on one or more of your credit cards is lowered, it may mean that card issuers are starting to view you as a greater credit risk.
Some card issuers are adopting complex credit-scoring models that take into account where you live geographically and the stores at which you shop. They also may be looking at whether you use your credit card to pay for things like groceries — a sign that you may be experiencing financial trouble.
Monitor your credit reports often. Because you can request a free report every 12 months from each of the three credit reporting agencies, rotate among them so you can check it every four months. Take a look at how many of your accounts, if any, have high balances in relation to your credit line and whether the report contains derogatory information, such as late payments.
These would be telltale signs that you are on the radar screen for a credit line decrease or a bump in your interest rate.
Try to pay off balances each month and read the printed material that comes with your monthly statements. Credit card issuers often slip in important information about your account along with marketing offers.
Be sure to monitor your balance and keep it under 30 percent of your credit limit to prevent further dings on your credit score. Avoid exceeding your limit, because that can cost you plenty in over-limit fees, says Consumer Action’s Linda Sherry. If that happens, you also may face a high default rate.
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.”