Posts Tagged ‘manage credit’

What Can We Do About It?

Credit cards were once considered “easy money” by most people, and were used whenever they didn’t have the cash on hand to pay for their bills or make small or large purchases. Now, with consumer debt reaching all-time highs, the credit card companies are tightening the purse strings and reducing the credit limits on cards — often without so much as a warning to consumers about the changes.

The laws governing the notification policy may need to be looked at and revised, to say the least! Banks and mortgage companies are required to notify their customers within three days of making changes to the credit limits of their customers holding home equity lines of credit; credit card lenders, on the other hand, have up to 30 days after making the credit limit change to notify their cardholders of the change.

What happens when cardholders aren’t aware of their credit limit decrease and continue to use their card within that 30-day time period before they’re notified? Best-case scenario is that the cardholder experiences mild embarassment when their card is declined when they try to use it, but more commonly the purchase will go through and the cardholder ends up having to pay an over-the-limit fee for every month the balance of the account is over the new, lowered limit.

The lowered credit limits have long-term effects on consumers, as well. In addition to making it more difficult for a customer to pay bills or make purchases in an already difficult economic time, lowered credit limits can result in lower credit scores. Considering that the calculation of the FICO score takes into account how much of your available credit you’re currently using, lowered credit limits will have an unfavorable impact on the magic number that all lenders rely on to determine your creditworthiness — and the interest rate you’ll receive. As your credit limits are decreased, the percentage of available credit you’re using increases, which results in lowering your credit score by several points.

Lowered credit scores can affect the accounts you currently have — your existing creditors are likely to check your credit report on a regular basis to note any changes in your financial situation or level of assumed “risk.” If your credit score is lowered, chances are your existing accounts will start raising your interest rates on the money you already owe.

If you think having excellent credit and no late payments will save you from having your credit card limits lowered, think again. Individuals holding Visa, MasterCard and American Express cards can have their credit limits lowered simply for living in an area that’s being hit hard by what experts call the “housing crisis,” regardless of what your payment history or credit score looks like. In fact, the terms of the card you sign when applying clearly state that your credit limits can change at any time, and most include a statement about changing the limits based on “market conditions.” Also, individuals who are self-employed in industries considered to be high-risk — such as any business tied into the real estate industry — are prime targets for credit limit decreases.

Unfortunately, there doesn’t seem to be much consumers can do to prevent their credit limits from being lowered, but there are some steps you can take to reduce the impact that a lowered credit score can have on your financial situation:

1. If your card provides it, sign up and view your balance in your online account manager. If the available balance changes, you should pick up on it quickly if you’re regularly viewing your account information and can avoid spending over the limit, therefore avoiding over-the-limit fees and over-utilization of your available credit limit.
2. When your credit card statements come in, be sure to look them over carefully for any changes to your credit limit. Also open and read all documents from your credit card lenders, to see if any of the mailings are to notify you of a credit limit change.
3. Adjust your card use accordingly to ensure you’re using less of your available credit. This will lower the impact on your credit score. Try to keep your balances paid off each month; if that’s not possible, keep your balances under 30% of your available credit limit. As your credit limits are lowered, make larger payments on your credit cards to reduce the amount you’re utilizing and to keep your credit score from dropping along with the credit limits.