Why Did the Credit Card Lower My Line of Credit?

Faced with an uncertain economic climate, banks have been reducing credit limits on consumers and business owners with high and low credit scores alike. The reasoning behind some of these reductions is very murky, and it is important to understand the ways to prevent similar reductions on your cards.

Significance

The lowering of credit rates and closing of inactive cards is important to consumers because it can negatively impact credit scores. According to Gail Cunningham, senior director of public relations for the National Foundation for Credit Counseling, about 30 percent of your credit score is based on the percentage of your credit limit you've actually used, or the "credit utilization ratio." (Reference 3). A lower credit limit can lead to a higher utilization ratio and negatively impact your score.

Reasoning

Here are some statements from leading banks from a recent article in the Wall Street Journal:
"We are taking a more aggressive look at accounts to control risk given the current economic environment. We are closing accounts with zero balances that have been inactive for more than a year and may adjust customers' credit lines up or down" based on "their risk profile and performance" (Bank of America).
"We will lower credit lines for customers who are showing signs of increased risk or inactivity" (J.P. Morgan Chase & Co.).
Also, according to a recent study by Consumer Action, banks such as American Express Co., US Bancorp, Washington Mutual Inc. and Wells Fargo & Co. reported that they "would reduce cardholders' credit limits because of perceived customer risk, such as high balances or late payments on credit cards."

Prevention/Solution

According to www.smartmoney.com, there are five ways to protect yourself against these credit slashes: lower your credit card balances to make yourself less of a target for banks, watch the mail for notifications of balances being lowered, check your credit report for errors and identity theft, sign up for online alerts about your balance utilization, and be prepared to shop around for better deals on other credit cards if need be.

Warning

Be particularly careful of checking your current credit limit, as over-charging your limit in the case of a medical or family emergency can trigger substantial fees from your lender.

Misconceptions

The lowering of rates is not only affecting consumers with bad credit scores or those carrying balances. Carol Kaplan, spokeswoman for the American Bankers Association, was quoted as saying "people with credit scores of at least 720 ... are not immune. They're doing it to everyone" (Reference 1). If you do fall into the category of those with a good credit score and your limit is reduced, call your bank and ask to speak to a manager, making a case for your longstanding loyalty and good financial habits.