Credit Card Companies Lowering Credit Limits
Let me answer your questions one at a time:
Why are Credit Card Companies Reducing Card Limits?
While it probably doesn't make you feel any better, I can tell you that this situation has become increasingly common in the current economy. The main reason credit card companies are doing this is to reduce their risk. Most financial companies are on shaky ground right now, and we have even seen quite a few banks collapse over the last few months. This, of course, can all be tied back to the housing crisis that spread through our economy as a while.
Your question actually came at a good time, because I've been researching this lately. I was going to write about it sooner or later, and your question prompted me to make it "sooner."
The next logical question is: When lowering credit card limits how do these companies decide who to target? Which customers will have their limit reduced and which ones will be unaffected? This will vary from one card company to the next, but it seems that most are reducing limits based on their customers' credit scores and payment histories. In other words, they are lowering limits on those customers they feel are the biggest financial risk to them.
In some cases, however, the credit card companies may paint with a broader brush. For example, if their research suggests that customers with a credit score under 700 have an increased risk of missing payments in this economy, they might lower the credit card limits for everyone in that category. Like I said, the process and the reasoning will vary from one card company to the next.
You can find out if your limit has been lowered by looking at your credit card statement, or by going online to the company's website (using your online account).
Will the Lowering of My Limit Affect My Credit Score?
It might, and here's why. Credit utilization is one of the key factors that influence your overall credit score. Utilization refers to the percentage of your available credit that you are currently using. In other words, if your card has a limit of $30,000 and your current balance is $9,000, then you are using less than a third of your available credit. If you have several cards like most Americans do, they will all be factored in to determine your utilization ratio.
So, when a credit card company lowers your limit, it affects your utilization ratio -- even if your balance stays the same. From the scenario above, let's say your card limit was reduced from $30,000 to $10,000. Before the reduction, you were only using less than one third of your available limit. After the reduction, however, you would nearly be maxed out on that credit limit (by using 9K of a 10K limit). Nothing changed on your end ... it was all brought on by the company lowering your credit card limit. It may not seem fair, but it's perfectly legal.
This is how it can affect your overall credit score, by changing your utilization ratio. What can you do about it? Well, there are only a few things you have control of in this situation. Your credit card balance is one of those things. By paying down your balance, you can put your utilization ratio back into a more favorable light. This will help you improve your score. And going forward, make sure you pay all of your bills on time. This will also help you build and maintain a high score.
If your score is really low, you might want to check out our guide to repairing bad credit.
I hope this answers your question. I found a bunch of information online when I was researching this topic, so you might want to do some Internet research of your own. Just consider the date of publication when you read an article about companies lower credit card limits, since this is a timely topic.
Related questions:
- What is a good FICO score in this economy?
- How do I read my credit report?
- The Best Credit Card Offers We've Found
Labels: cards
posted by Brandon at
6:28 AM
