Help! The bank keeps cutting my card's credit limit
Dear Credit Score Report,
Every few months, I receive a letter from Chase saying that my credit card balances are too high relative to my credit limits, so they are reducing my credit limit on their card. That, of course, only makes the ratio higher. Our total combined balances on our credit cards are less than 20 percent of our annual income. If FICO does not know my income, how can they determine that balances are too high? -- Bruce
Chase's concerns about your ability to repay have you trapped in a vicious circle. By reducing your debt levels and speaking with the bank, you can ease its fears and escape the cycle.
Since you mentioned in a follow-up e-mail that you don't have a checking account with Chase -- and the credit bureaus and FICO don't know how much you earn -- the bank can't take your income or savings into account. Instead, Chase is concerned with your utilization ratio, which compares revolving balances (such as your credit card balance) to credit limits. That ratio is considered a strong indicator of whether your lenders will get repaid. "Lenders have found that if a person is charging to their limits, they have a much higher chance of defaulting on the debt," says Rod Griffin, director of public education for credit bureau Experian. Now it's your job to remedy this by reducing your debts and letting the bank know it doesn't have reason to worry.
You indicate you owe a bit less than 20 percent of your annual income to your credit card issuers. That may or may not be excessive. If you have no mortgage and no monthly auto payments, and your income is solid, your credit card bill is something you can handle. If you already have a big mortgage and a big auto payment, it's way too much.
Your bank has decided your credit card bill is excessive. By reducing the amount you can charge, the bank is protecting itself against losses should you max out your account and then be unable to repay your debt. "In cases where customers have high levels of debt, we believe that lowering a credit limit is a responsible action for everyone involved. It protects both the customer and Chase," says Chase spokesman Paul Hartwick.
Chase isn't alone. Other banks are taking similar precautionary steps, with a late 2010 Federal Reserve survey showing twice as many banks lowered credit card limits for existing cardholders as increased them. Your other credit card issuers may be equally concerned about your debt levels -- they just haven't taken action yet.
If you have substantial income, put some of that cash toward reducing your debt levels. Try to rely less on your credit cards and more on paying by cash, check or debit card. If you must charge purchases or expenses, consider paying down your credit card balances more than once during a billing cycle. These steps will help lower your utilization ratios.
Meanwhile, call Chase. Be ready to explain your situation, as you did in your e-mail, and provide details about your personal finances. "A customer whose credit limit has been reduced or closed can always contact Chase to discuss it," Hartwick says. "The customer may be able to share other information, such as salary or other details that may enable us to increase his or her credit card limit or reopen the account." Just as paying off debt does, increasing your credit limits will improve your utilization ratio. If Chase won't agree to maintain or increase your credit limit, consider taking your business to another card issuer.
More than likely, however, by following these suggestions you can repair your relationship with Chase and put an end to the cycle of declining credit limits.
See related: Banks continue to ease lending standards, Fed survey shows, Credit score suffers from being caught in 'balance chasing' loop, Card issuers ready to check cardholder income, assets, What the new credit card law means for you
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