• Bob Brooks

Can My Credit Card Reduce My Credit Limit?

When you sign up for a credit card, you basically sign your rights away. They can change just about anything on your card- some changes they don't even have to notify you. The credit limit reduction is one of those items. Gear up because it is coming. During the 2008 financial crisis, credit card companies reduced credit limits on cards. Of course, the new credit card legislation that was to be enacted in 2009 also didn't hurt. Regardless, we are looking at potentially worst economic conditions than in 2008. Credit card companies have already started to reduce their risk by limiting what you can charge or borrow. That is a blow for two reasons. First, consumer spending statistics and the continual rise in credit card debt would indicate that consumers rely on credit cards to replace lost income. Credit card companies might want to shut that access to credit card accounts off and reduce their exposure to default. Second, it potentially hurts your credit score. There is a metric that can positively or negatively influence your credit score called the credit utilization ratio. That basically measures what percent of your open lines of credit are being utilized. For instance, if you have $10,000 of open credit lines and you have debt against those credit lines of $3,000, you have a credit utilization ratio of 30%. ($3000 total debt and credit limits that add up to $10,000) It is when you get over 30% that your credit score suffers. For example, using the above scenario, your debt level is now $5000, and your credit utilization ratio went up from 30% to 50%. Now let's say that your debt stayed at $3000, and your credit lines were reduced from $10,000 to $5,000. Then your credit utilization went from 30%, which was good to 60%, which is not very good. That 60% ratio went up because your total debt is $3000, and your credit limits available are $5000. Consumer credit cards are the absolute worst consumer contract that you will ever sign. One of the few contracts that you sign is not binding and can be changed for whatever reason. Between 20% percentile in interest rates and making changes that will hurt your credit score, they can quickly become in control of your financial life.