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Credit Cards Slash Risk by Reducing Limits

By Jeff Brown
Millions of Americans are getting unwelcome mail from their credit card companies: credit limits are slashed, sometimes by more than half.

These notices are even going to people who’ve never missed a payment, still have good-paying jobs and keep their card balances well below the limit.

So what’s going on and what should you do if you receive one of these letters?

In a nutshell, various surveys show soaring numbers of cardholders are falling behind on payments, and as a result, card companies are adjusting their formulas to reduce risks.

Even cardholders who don’t carry balances from month to month may find their limits cut, because that reduces the potential debt the issuer could face, making it easier for the issuer to borrow money.

If you don’t carry a balance, or if you keep it well below the new limit, you may not care that your limit is reduced. But the change is still worth investigating.

First, carefully read the notice to see the reasoning behind the change. If the issuer is wrong, claiming you’ve been late when you haven’t, for instance, phone the 800-number to straighten things out.

Next, check your credit report (https://www.annualcreditreport.com/cra/index.jsp   ) for errors that could have affected your credit rating.  Fair Isaac (Stock Quote: FIC) offers an explanation of credit scoring on its web site.

If you are issued a new limit, try not to allow your balance to exceed more than 30 percent of your new, lower limit, as that could hurt your credit rating. Think about some belt tightening to pay off your card debt -- use the sbup Payoff Credit Card calculator to devise a strategy or consider using a home equity loan to consolidate debts at a lower interest rate.

If you really need a higher limit, such as for business expenses that don’t get reimbursed quickly, try appealing to the card company. You might succeed if you’ve just been caught up in a sweeping policy change and you’re clearly a good risk. But if you don't you can always look for another card if your appeal fails – check out the manybanking.com shopping tool for more information. Discover Card (Stock Quote: DFS) and Citibank (Stock Quote: C) offer some low-interest cards for people with good credit.

People who carry sizable balances should look for cards charging the lowest interest rate, even if it means paying an annual fee. Those who pay their balances in full every month should avoid annual fees and worry less about the rates, since these card users typically do not pay interest.

Still, remember that opening new card accounts show up on your credit report, and doing it often, or having a multitude of cards, could ultimately hurt your credit rating, even if you have an exemplary payment history.

Also, don’t be too quick to give up a card you’ve had for a long time, as a long history of responsible card use boosts your credit rating.

Finally, remember that credit cards are best used for convenience and not borrowing. You can enjoy the same convenience and avoid building debt by using a bank debit card that will pay for purchases right from your checking account.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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