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When Credit Card Companies Lower Your Credit Limit

When Credit Card Companies Lower Your Credit Limit

Has this happened to you? It may have happened and you didn't know it because it was tucked into the fine print of your recent bill. But if you aren't using the full limit..... Does this action by the credit card company help you or hurt you!?!?!?!?

It will hurt!! Plain and simple.

There is a term used by the experts in credit scoring.... And that word is Utilization. We are referring to how much of your revolving credit lines that you are currently using. And this is about 30% of your FICO Score.
So how can this hurt? Let's start with an example:

Joe owes $750 on his Visa card. The limit is $2500. Joe is currently using 30%(750/2500) of his credit limit. Experts agree that you should strive to keep that utilization % below 30% and the lower the better. Why? Because once you start approaching the higher percentages.... The FICO Scoring Method sees you as a great risk. Think about it.... Someone with 30% utilization vs someone with all of their credit cards maxed out.... Who is the better risk? Well, FICO knows.... and the person with the high utilization will have a much lower FICO Score as a result.

Ok.... So Joe is being responsible. His hot water heater breaks and he put that purchase on the card to the tune of 30% utilization. But then the credit card company lowers Joe's limit to $1000 to reduce their exposure to risk. Overnight, Joe went from a responsible 30% to utilizing 75%(750/1000) of his credit limit. Ooooops!!! Now what? Well, it is quite possible that Joe's respectable 720 credit score falls into the high 600s. Let's say 660 or so. What is the impact? Go try and buy a car with a 660 FICO and 720 FICO and see what interest rate difference you get. Try to buy a home on a conventional mortgage with a sub 680 FICO Score and see the if you are eligible for PMI.

But, Tom, I pay off the balance in FULL each month? So this doesn't affect me!!
Not so fast.... If you put $800 travel expenses on that $1000 limit credit card and that gets reported to the credit bureaus on the 4th of the month..... Yet you pay your bill on the 5th.... What number will FICO use? That's right, they will assume 80% utilization and dock you many points for it right then and there.

So, how can you protect yourself?
Keep more than one credit card.
Spread out large expenditures over a few cards.
Open a store card for that one time purchase(hot water heater example)
Know when your credit cards report your balance and pay history to Experian, Equifax & Transunion so you can pay off/down those cards before you apply for that big purchase like a car or new home.

Note: FICO says that it adds up all of your limits and all of your balances to calculate FICO. However, I have seen people suffer greatly by maxing out one card when they had 3 other cards with zero balance. Don't ask me why... This has been experienced by me more than once.

This credit scoring tip has saved many of my clients thousands of dollars... And it could save YOU many thousands too!!!

Did you know: That if a credit card company raises your interest rate that you have a right to cancel the card and pay it off under the old terms**?

** Remember: If you close that account, it lowers your total revolving credit available balance and could raise your 'utilization' which we discussed.

Tom Burris
DallasLoanGuy.com
Dallas, TX

http://www.dallasloanguy.com/

I write about Texas Home Loans , live in the Dallas, TX area and lend across the entire Great State of Texas!!

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Posted by Tom Burris | Texas Mortgage Dallas Mortgage FHA on 11/03/2009 10:04 AM

Comments (49)

FICO Scores in the Mortgage / Finance Channel

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Originally posted at: Texas Home Loan Blog: When Credit Card Companies Lower Your Credit Limit

This post has been included in Texas Information Dallas County, TX Information
Post is included in group: Home & Credit Savvy

49 Comments on When Credit Card Companies Lower Your Credit Limit

NOV

Hmmm.... I didn't know that. THanks for sharing. I hope to not depend on the FICO score soon.

Unless you can pay cash for a home, you need a FICO.

Credit is leverage. And if used wisely is a smart bet.

What's your answer to some credit card companies starting to charge yearly fees for paying off your balance every month, or not holding a balance, yet the card shows history which is good for your credit score? Would you tell people to cancel the card or suck up the annual fee they're going to charge for each card?

I would suggest that they revolve a very small balance, I guess. I haven't read the fine print. Call it a cost to maintain good credit.

Closing old accounts is not the best long term strategy since length of credit is important.

Yes, but revolving a small balance still incurs finance charges, which is what I'm trying to avoid when paying in full. Circle...

You may not be able to avoid fees altogether in the future.

These companies got slapped by the government for some of their practices and are looking for ways to make more in fees.

Holding a credit card for free orever may be a thing of the past.

NOV

How do you find out what day they report it? I have not had a limit reduced, but have had my interest rates jacked up this year.

I have been told that you can find out if you just ask them.

I have never asked.... But my clients have.

I have seen some rates get jacked up to. Did you know that if they raise your rate, you have a right to close the card and pay out the balance under the current terms? If you accept the rate increase, then your balance will start accruing interest at the higher rate.

Bookmarked this one, and may have to figure out re-blogging!

For a no-fee credit card, try your local credit unions...The rates and terms are better than the big bank cards.

Joetta, there is a small reblog button at the top to the right of the title. It will open up in your blog so you can add a note for your peeps.

Yes, Tim.... We forget about the credit unions sometimes. They are great.

Ditto, interest rates got jacked up to over 24% on Discover card and we have faithfully paid full balance since I can remember. It would seem that this ought to be usury!

Spreading your risk with multiple credit card issuers is very difficult because there are really only a handful of issuers out there and will be fewer as the banks continue to consolidate. Case in point - First USA in Chicago got swallowed up by Chase. WAMU's credit card business also got swallowed up by Chase. So now Chase looks at you as a poor credit risk because your debt is too concentrated with them.

The credit card issuers have also unilaterally changed credit terms with a "take it or leave it" attitude. All of those cards that were issued with the option to transfer money at 0% or 3.99% "for the life of the transfer" have changed their minimum payments from 2% to 5%. That is a huge adjustment for those who borrowed heavily because it was cheaper than an equity loan, and are now faced with much bigger payments.

Hi Tom,

Excellent post. It seems like sometimes when one CC company drops their limit or raises their rate, others will follow suit - starting a downward spiral - even though the consumer have perfect history with them. Have you seen that happen? Thanks for sharing.

John: I thought we did have usury laws..... must have been relaxed.

Weichert: Another poster suggested using credit unions.

Michael: I haven't had a limit decreased.... but I have had some rates go from 7% to 9% ish. I have perfect payment history, perfect credit. I shudder to think what they do to those with less than perfect credit

Tom,

Thanks for bring up the big ugly elephant in the room that no one seems to be aware of... FICO scoring is flawed and is not a valid method of determining a persons creditworthiness.This will become more and more obvious as millions of Americans lose 100+ points in their FICO scores simple because the C.C. companies decide to reduce their balance, or cancel their card.

That for the tips Tom!! I believe the credit model will have to change over the next couple of years due to this economy/fallout!! All the best!!

The credit card companies lobbied congress years ago to make sure they were expempted from most usery laws. Not only will your auto loan and insurance rates (even home owners policies) be based on your lower FICO, but the very credit card companies that lower your limits to cause negative FICO movement will jack your rates out of sight. I've got several cards and used them on occasion for operating funds since the 6 month teaser rates were much lower than what I could borrow for at the bank. With business slowed, some of these have slipped past the introductory period before I can pay them off. I've been paying them off as quickly as I can but every time I pay one down/off, they lower the limit and raise the rate.

Tarp money was supposed to be to get the banks liquid and loaning money again but most of them took the money, stuck it into no risk treasuries, and are collecting interest (ON OUR MONEY) instead of loaning it. On money they've already got out, they're jacking rates to increase they profits even though their cost of funds is going down if anything.

Our industry has regulation Z to keep our advertising honest. The credit card industry needs something similar. When you get a bunch of checks in the mail with a big bold font at the top touting 1.99% interest for 4 months and then have to search thru the very fine print (usually on another page somewhere) you see they charge a 4% "processing fee". If you take the time to figure the actually APR, you're paying 13.99% for that 4-month loan!!!

I can't decide who are the bigger bandits... the banks or the insurance companies.

Lee: I agree.... FICO needs to look at this utilization issue.

Stephen: There have been a few tweaks. But I see a major change coming.

Gregg: Unsecured credit card rates were artificially low because they were making a ton on their fees and other games. Now that the government has stepped in they have to raise rates to get back to former profit levels.
Think about it.... People who have gone over their limit and pay late got relief from the government intervention. People who pay on time and use the cards responsibly pay the bill. Sound familiar?

It all will have a great effect on the ability of people to qualify on A paper loans.

I have abetter idea....pay cash and sh*tcan the credit cards. That way the interest is zero and the banks can continue to slouch toward oblivion.

Mark: It may indeed affect one's abaility to get a loan. And it will also make their loan more expensive too!!

Sudden: Great idea. But this is the real world.

Thanks for the info. Homebuyers will need to keep this in mind as they prepare for their purchases.

Hey, What's the surprise? Every aspect on the financial system is tightening as a result of the no regulation screw up of which we are now working our way out. Yes, I was surprised to have out Equity Line of Credit cut back as our property became down-valued, but fortunately we had not used beyond to where they reduced it. It will take a while for the entire banking industry to get back to anywhere near where it should have been under regulations.

Tamara: Yes, indeed people need to be credit ready when they make big purchases. Most do not think ahead like that because they do not understand credit scoring.

James: No regulation? Or too much regulation?

The entire credit system is rigged against the consumer and designed to keep us in debt. I have a single car loan and a Sears Card. That is it. I may get a line of credit for some new computers next year (to help my credit - which is not too bad, but not great) and I will get one of those no interest offers and pay it off in time.

Wow - great post and commentary. I was just discussing the raising credit card rates and lower limits with someone this morning. Very scary stuff. How is the economy going to recover if America continues to carry huge debt with no hope of paying it off.

Gene: It may seem that way. But the credit card companies can't make you buy that 60" LCD and Surround Sound.

credit card companies are ridiculous! if our gov't wants to do something to help people, they have their job cut out with just this issue alone.

Tom,

Yes, these new changes are very hurtful. I'm not sure that our Credit Card systems can weather thru this recession. And this might be a good thing! We may need to resume using cash in our everyday lives!

Kathy Opatka

Peter: Gov't? That is not the solution to everything.

Kathy: Over a year ago I was hearing rumblings that the credit card crash would follow the housing crash.

The credit card companies have way too much leeway in what they can do. And the credit scoring system is somewhat arbitrary. Why does an inquirey lower your score?

I manage a family business' credit cards (outside of real estate, and it's about half a million $ in credit cards so I have lots of experience with all of the big card issuers). It doesn't matter how good a customer you are, they will find a way to screw you over. I think the best one yet is their 'lower your credit limit which lowers your FICO, raise your interest rate and justify it with your lower FICO score' scam.

I maintain an even keel when talking about just about any industry and I can see justifications for a lot of things that would make most people mad. Credit card issuers, not so much.

Thanks for the tip - "That if a credit card company raises your interest rate that you have a right to cancel the card and pay it off under the old terms?"

That is very good to know!

Many people who have been long time users of Chase credit cards are experiencing many heartaches with this company. People who have faithfully paid their bills on time and have high credit scores are having cards canceled, credit limits lowered, interest rates raised and minimum payment increased.

Chase's response? If you don't like it, you can refuse the change in terms but then we will cancel your card. Nice doing business with ya! For me and my husband, 20 years of being a faithful excellent customer meant nothing. Hello Capital One, so far they have been excellent!

This is great information and there are too many people who don't realize how much their credit cards are really costing. From the credit scoring point of view, utilization rate is a big factor in determining the score. In the real estate business, we should at least be alerting our buyers as to what constitutes a good utilization rate. Another factor is the mix of credit and having a couple of cards (assuming they are well managed) also adds to having a good score. One of the biggest factors is credit history, and again, closing down accounts, particularly older ones can hurt. It is important to understand all the factors that go into the FICO before having a knee jerk reaction that could do more harm than good. There needs to be more education in basic credit management.

To Jirius - 10% of the FICO is calculated on inquiries and each one can lower a score by 5-8 points. It is assumed that when people are having difficulity getting credit, they "shop" around more, thereby suggesting they are a greater credit risk. It doesn't necessarily make sense, it's just the way the system is set up.

The credit card companies have a concept they call the "universal default rate" which is a much higher rate than that which you are probably paying now if you have low balances and pay on time. You probably got this low rate because you responded to their solicitations to open an account with them.

Now, once they have you, they are continuously attempting to find a reason to raise your rate. There are so many reasons that they have invented to accomplish this that you may well fall into their traps. For example, if you are over your limit or late with another card, they will use this as an excuse to impose the universal default rate without notice to you. Lowering your credit limit is one way to increase your utilization rate which gives them another excuse.

Congress has reluctantly responded to the public outcry at this piracy to some degree. It as passed laws limiting the companies' ability to do some of this, but gave them so much time before the new laws kicked in that the companies have been very busy raising rates and reducing limits before they get restrained. This one reason that the companies are charging a "no use" fee now, to make up for some of the fee and penalty nonsense that they have been getting away with.

But we all still need credit cards to establish our credit worthiness. So they best thing to do now is to keep your cards open, use them at least once per year -- you need not revolve them, just charge something on each one and pay them off within the grace period.

"This is a great time to buy a house".

Akron, Ohio

Tom, some very interesting and disturbing points you made with this post. I was surprised that I can cancel a card if the company raises the interest rate and then pay off under the old terms. It it is not paid off all at once, are you still billed the interest under the old plan until it's paid off....is that what you are saying?

I'm going to be watching mine alittle closer thanks to your post. Good Job!

Great info. Lots of people are not aware of credit card companies reducing limits...

Jirius: They are in the free market. They can act however they want.... They just shouldn't be allowed to use dirty tactics. If you are applying for credit, you are more of a risk than someone who isn't.... this is acoring to historical data.

Julia: 1/2 a Mill? That's scary.

Keith: Thanks for stopping by.

Tammy: Free market.... they can act however they want and you can choose to use their service or NOT.

Nancy: Credit 101 should be required before people graduate high school. And Credit 201 should the first course they take in college.

Thomas: Indeed, some of these moves are a response to cngressional action against them.

Doug: Yes. An example..... You buy a 60" big screen tv and next month the credit card company raises your rate from 7% to 13%. You have a right to say "no thank you, close the card and I will pay off the card under the old terms(7%).... and you can take as long as you wish as long as you are paying on time they cannot do anything about it.

I am always amazed at how key credit scores are in real estate transactions. The average person still doesn't understand this. The financial aspects of the deal are more important than anything else.

Hi Tom,

Great post! I may have to reblog this if that's ok. Or share it on twitter. I'm sure there are a lot of people like myself who had no idea.

Thank you,

DeeDee

Good advice Tom. Credit card companies play by their own rules. It seems thay have a license to print money.

Marian: We have to preach it!!

DeeDee: Please share this. Reblog, twitter, facebook

Tigard: They got slapped pretty good recently by the govt. At least their tricks were exposed.

NOV

Great post. You should post a warning about closing the card can adversely effect your credit score negatively by limiting your credit and getting rid of some long standing credit card history.

Great post Tom. I was just trying to get a 'guest post' from a credit reporting agency that we had this exact same talk. The credit cards are doing this to everyone they can in effect ruining everyone's credit. Why? I think they are figuring on lower fico scores = higher interest rates! This is a great new scam from credit providers that the public needs to know about. Plan a strategy for your credit score!

Mike: Good point!! I will edit the original

Lyn: Guest post? How about a reblog?

NOV

Wow. I have not thought of that Tom. I will definitely keep this in mind.

NOV

Tom,

Thanks for the informative blog, very sound information that home buyers and mortgage professionals should understand. In addition to this action lowering ones credit score, it starts a viscous cycle as other credit card issuers identify ones account as having a lower score, thus prompting them to lower the limit on yet another card. Too bad they don't just freeze charging privileges on the card without lowering the limit, which would not result in a drop in credit scores for responsible users of credit cards.

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