If you rely on your credit cards to make ends meet some months, a decrease of your limit can cause a crisis. Credit card companies have the power to lower your limits at any moment. That's why, especially in times of economic decline and uncertainty, you should think twice about depending on your revolving credit accounts to pay for necessities.
If a credit card company suspects you may not pay your monthly bill or total balance, they can decrease your limit to prevent you from borrowing more money. It's legal for creditors to check your credit report periodically. If you pay another bill late or you max out limits on other debt, your credit card company can get nervous. Your limit may be decreased to reduce the likelihood of defaulting on your payment (thereby minimizing the company's risk) — especially if you're having trouble meeting your other obligations.
In addition to raising your interest rates, credit card companies may close accounts when your creditworthiness comes into question. Even if your credit score is considered high, such as over 700, using a large percentage of your limit on a regular basis can cause a credit card company to cut your access to more money. If you have a card you haven't used in a long time, such as a year, you may find your account abruptly cancelled.
The Credit Card Accountability, Responsibility and Disclosure Act, or CARD, requires companies to inform you 45 days before revising the terms of your account. To make sure your limit hasn't been changed, review your statements carefully, especially the amount you're allowed to borrow. Pay all your bills by the due date to avoid triggering a limit decrease. In addition, don't spend close to your maximum or apply for more debt. Understanding why limits are lowered can help you prevent it from happening.
Part of your credit rating is based on the total amount of credit you use in comparison to your total credit limit. When your total limit is reduced, your credit score may be lowered as a consequence. For this reason, don't close your credit card accounts, even if you don't use them, unless you can't control your spending. You can be hit with fees and a higher interest rate for spending more than your limit. If your limit is reduced, carefully track your purchases to ensure you are staying comfortably under that limit.
- MSNBC: Downturn Brings Big Changes to Card Industry
- SmartMoney: 10 Things Credit-Card Companies Won't Say
- SmartMoney: Banks Lowering Consumers' Credit-Card Limits
- The Wall Street Journal: Credit Card Companies Slash Credit Limits
- Bankrate.com: Coping with Lower Credit Card Limits
- USA Today: How to Make the Most of the New Credit Card Protections
- The Washington Post: Companies Slash Customers' Credit Lines