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What to do if Your Credit Limit is Cut
Anyone listening to the news lately knows that credit card companies are cutting credit limits. If you are the average consumer, your credit card limit represents part of your emergency fund, your Christmas spending, or your next vacation. If the idea that your credit card company might lower your limit has created an unexpected storm on your financial horizon, read on and take shelter. Planning for the unexpected is really the only way to survive the storm.
Obviously, the first targets of the credit card companies will be those people who have short payment histories, are frequently late, or are over their credit limit. However, you should also be wary if your balance frequently flirts with the credit limit, despite a positive payment history. The less money you owe the company and the better your payment history, the more likely the credit card company will not lower your limit.
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To avoid potential embarrassment, you should also frequently check your account online. Also, be sure to open all your mail. The credit card company will most likely notify you of your new credit limit by mail, but your online account information will also reflect the change. You maybe able to set up your online account to send you emails when your credit limit is changed or when you are near your limit.
The new tightening in credit is also a sign you should shift your spending priorities. If you depend on your credit card for everyday purchases, then you need to immediately fashion a stop-gap. If you are one of the people whose limits are cut, then you would no longer be able to make necessary purchases. The same is true for people who depend on their credit card for an emergency fund. At all times, you need three to six months of living expenses in the bank. This money should not come from available balances on credit cards. Cash is the only way to go.
In the past, if a credit card company lowered your limit, then you could simply shop for another credit card and take your business elsewhere, but since everyone is facing the cash crunch, the number of banks willing to extend credit to anyone without the very best credit is shrinking everyday. Even if you have average credit and were able to get a new card a year ago, you may find that your offers have diminished greatly over the last twelve months.
To make matters worse, the cut in your credit limit will also likely affect your credit score, which in turn will make finding a new card harder. Part of your credit score is based on your available credit, and if your company lowers your limit to the amount of your current balance, for example, then your credit score would drop significantly because you would then be using all of your available credit. Likewise, if your credit card company lowers your credit below your balance, you might then be charged over-the-limit fees.
What you can do to combat this particularly bad cycle is less clear. If possible, pay your credit cards off and learn to live on cash alone. If that is not possible, attempt to put back as much savings as possible, and pay your credit cards more slowly as you learn to live without credit. If your credit card company lowers your limit and then charges you fees, you may be able to negotiate for the removal of the fees.
The credit crunch will surely ease eventually, but you don't want to be left out in the cold during the recovery. Have a plan in place for living without your credit limit, and you will be able to ride out the credit storm with a somewhat calm financial demeanor.
Published on BankingQuestions.com 12/15/08
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