Although credit cards often charge high interest rates, they can be a useful resource for people, or businesses, that need cash. Having an unused line of credit in your back pocket can help you feel more secure. A credit card is an “unsecured loan,” meaning that you do not have to put up any collateral in order to use your credit line. Credit limits (the amount you are allowed to charge) are set based on a variety of factors including the general economy and your personal credit score and situation. Credit limits can change.
Often if you have not used your credit card recently, or have been paying it off, the company may raise your credit limit to tempt you into using it. If you have not been making regular payments, or they have other information that you are in financial trouble, or the general economy is bad, the credit card company may lower your credit limit. If this happens, you may need to take some action.
Why Care About a Lower Credit Limit?
If you do not plan on reaching your credit limit, you might think having a lower credit limit is unimportant. But, a lower credit limit can hurt your credit rating. This can affect the interest rate you are offered for major purchases such as a mortgage or car. It can work against you if you are applying for a business loan.
One of the factors considered in determining your credit score is how much you owe versus your total credit limit on all cards. That’s called the utilization rate. For example, if you have three cards with a total limit of $20,000 and you owe $10,000, your utilization rate is 50%. You are using 50% of your available credit. A higher utilization rate is an indicator of risk, and higher risk results in a lower credit score. In this example, if one of your cards lowers your credit limit by $5,000, you now have a utilization ratio of 67% ($10,000 / $15,000) and that could result in a lower credit score. Lower credit scores make it less likely for you to obtain a loan, or to negotiate a lower interest rate on a loan.
Your Legal Rights
You do not have a legal right to a specific credit limit, even if that is the limit you were promised when you opened your credit card account. However, if your credit card company lowers your credit limit and that puts your current balance over the limit, you do have some rights. The company can’t charge you a fee for being over the credit limit for 45 days. During that time, you should pay down your balance to keep it below the limit.
If you are receiving calls from credit cards, debt collectors, are other companies to whom you owe money, you should familiarize yourself with the Fair Debt Collection Practices Act (FDPCA) to make sure you know your legal rights.
What Should You Do?
First, check your credit report to see if there is anything that might have caused the credit card company to lower your limit. If there are mistakes, you want to get those mistakes corrected. Make sure to keep a written record of any conversation or dispute resolution. You can supply the record to the credit card company.
If you do not see any obvious reason for the lower rate, contact the issuer. Ask the credit card company why they made the change. See if there is new information you could provide that might cause a decision reversal. Be patient. It’s likely that the first person you speak to will not be able to provide the information and will need to transfer you to a manager. A manager who can explain the situation may not have the authority to make changes you request and you might be transferred again. The ability to keep calm is an important negotiation skill.
If the information you’re given is wrong or outdated, ask how you can prove it. This might include sending the dispute letter regarding mistaken information on the credit report, contesting fraudulent activity, or sending information about your income or other assets that prove you are a lower credit risk.
Reducing the Impact of a Lower Credit Limit
If your credit card has lowered your limit for no obvious reason, you could consider opening a new credit card, or contacting other credit card issuers to increase your limit. Be very careful about applying for other credit cards. Each time you apply, it creates an inquiry on your credit report. If there are a lot of inquiries on your credit report, that’s a negative factor in your credit score.
Paying down your balance so that your utilization rate decreases will help prevent future reductions. Always pay at least the minimum amount due by the due date. Paying your credit card bills even one day late can cause unnecessary problems.
Prevent Lower Credit Card Limits
It’s a good idea to check your credit reports frequently for mistakes or fraudulent activity. If you see something, report it immediately to the credit bureaus and your credit card companies. Using your cards responsibly, paying on time and keeping your utilization rate under 30% all help to show you are a lower risk.
Dean Kaplan is president of The Kaplan Group, a commercial collection agency specializing in large claims and international transactions. He has 35 years of manufacturing, international business leadership and customer service experience. Today, he provides business planning, training and consultation to a variety of global companies.
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