Todd Ossenfort has been chief operating officer for Pioneer Credit Counseling since 1998. He writes our weekly “The Credit Guy” column, answering reader questions about credit counseling and debt issues.
Dear Credit Guy,
Lately I’ve noticed that a few of my credit card issuers have lowered my credit limit even though I never miss a payment and almost always pay more than the minimum due every month. Is this fair? Also, I understand that if this happens, it can negatively affect your credit score because those reduced lines of credit make it appear that you have “maxed out” all your cards, which makes you look like a higher credit risk. Is there anything that can be done about this? It seems wrong to punish good “payers” who pay on time and over the amount due.
Great question. You are not alone. This has become a very common practice for many of the credit card issuing banks. It seems as if consumers are not the only ones who are suffering the consequences of the current economy. As is evident by the increasing number of layoffs and federal bailouts, companies are hurting as well. One of the ways that creditors are lessening their exposure to the distressed economy is to tighten lending practices.
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Unfortunately, creditors are not just screening new customers more stringently; they are also looking at current customers for ways to reduce their risk and exposure. One way lenders accomplish shrinking their risk is to lower the amount of credit a customer has available or, in other words, lower the person’s credit limit. Lowering credit limits have the added bonus for the creditor of increasing their lending power with that newly available credit.
What is a good move for the creditor may or may not be a bad move for you. If, once your credit limit is lowered, your balance is more than 50 percent of the new credit limit, then your credit-available-to-credit-utilized ratio goes up and your credit score goes down. For example, if you have a credit card with a $5,000 limit, you don’t want to carry a balance of more than $2,500 on that particular card. At the same time, if your total available credit on all of your cards is $20,000 (four credit cards with $5,000 limits) you don’t want to exceed $10,000 owed.
Don’t take the move by your creditor personally. Creditors are reviewing accounts and making decisions based on company needs and goals, not a particular person’s accounts. Because of this, if you are over the 50 percent mark mentioned, you might contact your creditor and request that your credit limit remain at its current level. After a personal review of your account and payment history, your request might be granted. It’s worth a try.
If your creditor(s) is unwilling to work with you and you must live with your reduced credit limits and are worried about a lowered credit score, then you will want to create a plan to aggressively pay down your balances to get them below that magical 50 percent of your credit limit (and 30 percent is even better). Even though you might be a tad miffed that you are forced into it, paying down your balances is a good idea anyway!
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As far as your credit score goes, anyone who is interested in viewing your credit history is likely to take a look at your credit report as well as your credit score. Your credit report will reflect your on time payment history and the other positive aspects of how you have handled your credit in the past. Those with an interest in your credit know of the current actions of creditors concerning credit limits and will take those facts into consideration when making any decisions based on your credit history.
Take care of your credit!
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