© 2001 - 2009 All Rights Reserved, The Credit Alternative Group, 26 Park St., Montclair, NJ 07042

Rebuild Your Credit   -   Restore Your Score   -   Smartly Manage Your Credit

More Smart Credit Moves

Protecting Your Credit in Today's Bad Economy

Why You Don't Want to Let a Credit Card Bill Go Unpaid

Don't Close Credit Cards With Any of These Five Situations

Find Credit Cards With Your Credit Score

Smart Credit Moves
Credit Limits Slashed
By Lathea & Morlino Morris, Co-Founders
The Credit Alternative Group, LLC

When I checked my email a few days ago, there was an email from American Express advising us our credit limit had been decreased. The email went on to say, we will receive a letter in a few days advising us as to why our credit limit had been decreased.
Actually, in light of the current economic crisis, we had predicted banks would take this type of action to minimize their risk. Many banks are concerned that consumers and small business owners who have access to credit limits will use their entire limits, then not be able to repay.
However, we had not predicted that they would slash limits of small business owners and consumers with good credit. So, despite great credit scores, a solid credit history, making timely payments and keeping careful track of each charge, we too are victims of the small business credit limit guillotine.
Consumers may wonder if their credit limit is slashed how this will impact their personal credit score. Well, that will depend on how much of your credit limit you have utilized. Thirty percent (30%) of your credit score is based on credit utilization or debt to credit limit ratio. By lowering your credit limit, this action increases your debt-to credit limit ratio. So, the closer you are to your limits, the lower your credit score will be. For example, someone with a $1,000 balance on a card with a $2500 limit is using 40% of their credit line. But if that limit drops to $1,500, they're now using 66% of their available credit.
Consumers are already finding it difficult in today's economic climate to get a loan, but now, by reducing credit limits, that could significantly help to decrease a credit score. This makes qualifying for a car loan, mortgage or home equity line of credit even more difficult.
So what can you do to protect your credit score? Keep your credit card balances at about 30% of your credit limit or less. For example, if your issuer lowers your limit from $5,000 to $3,000, you should charge no more than $900 on the card.
Many Americans live off of their credit cards. It's how they pay for necessities like groceries and gas. Reducing credit lines, also, present other problems for consumers. If an emergency should arise like a medical issue or temporary unemployment, consumers will have less credit to cover those costs. Consumers could also be assessed penalties for going over a credit limit that's lower than they thought. Additionally, due to universal default rules, many consumers could end up being hit with an interest rate increase. This rule, generally buried in the fine print of your credit card agreement, basically says that if you are one day late on any payment to any creditor, you could be subject to a default rate as high as 29.99%.