Banks cut your credit card limit and your credit score as well : Bad Credit Advisor

Banks cut your credit card limit and your credit score as well

I just got an issue with JP Morgan Chase. It lowered the credit limit on my business Visa from $17,000 to $6,900. As Chase put it, to meet my business needs better. Very touching, but well, they are right, I don't use this card much, it isn't reported to the credit agencies, I don't carry balance, so simpy put, I don't care. But what about those consumers who got their credit limit cut straight to the balance amount they carried at that very moment. A friend of mine had his American Express limit reduced to a $100 over the balance. He only has three more credit lines, so his credit score went down by some 50 points over 3 months or so. It happened, because with lowering his credit limit so low, the ratio between his balance and limit became very high which negatively affected his credit scores. Some call such a ratio a utilization rate. Good thing, his scores prior to this unpleasant situation were in the 800 point range. Not only your credit score suffer, but you can have interest rate and minimum payment increased quite substantially.

Worse, many expect this to continue, saying the issuers are likely to slash close to a trillion plus dollars in credit card lines in the next 12 months.

What are you going to do in a situation like this? Try to pay off your balances as quickly as possible, if not in full then reduce them greatly. If you pay off in full, don't close the card, no matter how irritated or mad you are, especially, if this is an old, established account. Closing it will ruin your credit even more, because credit-score companies look at the total amount of debt relative to credit limits on all credit cards when evaluating scores. Instead, keep it open with $0 balance, as it will fix credit score fast, in a matter of a few months.

If you have some good transfer offers from other credit card issuers, do it. By spreading your credit balance across two or three cards will decrease a utilization rate and help your credit score to recover.

It can get even worse. Two clients told me that their long held credit cards that they kept in case of emergency were closed with no advance notice because of inactivity. The perpetrators were Chase, Citi and Discover.

Tue May 12, 2009 12:05AM by Tony | More in Personal Finance | Comments (0)

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