Lower credit limits result in lower credit scores
OnlineGuideTo.com — What you don’t know can hurt you, especially when you do not know what is going on in your wallet — or in your credit card accounts.
In response both to the financial crisis and to new consumer protection rules slated to come into effect in 2010, credit card issuers are making major changes to customer accounts.
Many of these changes can negatively impact your credit score.
Yet a recent survey shows that:
A majority of credit card holders aren’t paying attention to potential changes to their accounts, a sign of poor financial literacy that could set them up for damaging situations, a new survey shows.
More than 66 percent of the people who responded to a survey done for Credit.com said they did not know what, if any changes, their credit card companies made to their card accounts recently.
[...]Had more of the people surveyed checked their statements carefully, they might have found changes including higher interest rates, lower credit limits and increased minimum payments, the study showed.
Higher interest rates were reported by 15 percent of the people who responded to the survey, while nearly 11 percent said their minimum payments were hiked and 8 percent said their credit limit was reduced.
“About 45 percent of U.S. banks reduced credit limits for new or existing credit-card customers in the fourth quarter of 2008, according to a Federal Reserve January survey of senior loan officers,” Bloomberg writes.
In its press release reporting the results of their survey Credit.com says
According to a new survey for National Consumer Protection Week (March 1-8) from Credit.com, a third (33.7%) of consumers say their credit card company has made one or more of the following changes to their credit account:
• Increased their interest rate 15%
• Increased their minimum payment due 11%
• Changed their due date 9%
• Lowered their credit limit 8%
• Reduced their rewards program 8%
• Closed their account 7%
Many banks reportedly do not even give their customers advance notice that their credit card account has closed. Others are a little more civil.
In fact, as KGO-TV in San Francisco reports, “American Express has sent out letters to select customers telling them if they will pay off their balance and close their accounts by April 30, 2009, American Express will give them $300.”
However, voluntarily cancelling a credit card does not boost your credit score. On the contrary, it will most likely lower it.
Yet your credit score can also be lowered through no fault of your own:
Millions of Americans have seen their credit card limits lowered since the economic crisis began, as credit card companies have tried to protect themselves against risk.
And it’s having a devastating ripple effect on consumers’ credit. By lowering people’s credit card limits, banks are also lowering people’s credit scores in many cases.
And that means these families will pay tens of thousands of dollars more for things like mortgages and car loans.
[O]ne of the biggest factors in your credit score is the amount of debt you carry compared to the amount of credit you’ve been approved for.
If you carry a high balanced on a credit card and the issuer of that card drops your credit limit, your ratio of debt to credit suddenly is much higher than before — and that negatively effects your credit score.
KGO-TV also reports that Some Chase customers have been told their minimum monthly payments would jump from 2 percent of the balance to 5 percent unless they agreed to let the company double their interest rate.
They’re not alone. Customers of Citigroup, Bank of America, JP Morgan Chase and American Express have also reported increased rates.
In 2010, a new set of Federal Reserve regulations for credit card companies will go into effect. Credit issuers are upset about the new consumer protection rules, and it appears that they are using the current financial crisis to try and put their houses in order before the end of the year
As always, it pays to know what is going on with your credit accounts.
Some consumers will choose to adjust their lifestyles choices to include less use of credit.
Others will protect their credit lines and credit scores as best as possible.
Among the steps you can take to help prevent lower limits:
• Keep your credit balance as low as possible. Experts suggest not charging more than 30% of your credit limit per card — and ideally not more than 30% in total across all your cards.
• Do not simply stop using your cards as dormant accounts are among the first slated for cancellation or the lower limit treatment. Use each of your cards at least once every two or three months — being careful to stay within your budget. If you are wise — and disciplined — enough, immediately set the money you charged aside. In other words, if you charged some tools or a new dress, make sure you either a) put a cash amount equal to the amount charged in a safe place, or b) subtract that mount from your available checking balance. Available credit all too easily is spent like ‘funny money’ because it does not feel like it’s coming out of your pocket. When you physcially take the $79.95 out of your pocket — to set aside for when the bill comes — at least you’re not spending it twice.
• Pay every bill on time, every time. If you can not do so, adjust your spending habits until you can. Do not put off payments to the last minute. Pay your bills as soon as possible. Make use of automatic payment options (but always check your statements).
• If your credit limit is lowered, your interest rate raised, or your card has been cancelled — and you are sure it is not due to something you did — it may pay to get in touch with the bank. Your account may have been flagged by a computer, in which case a human review of your account could see the changes withdrawn.
