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Reasons Credit Card Companies are Reducing Credit Limit

written by: nataliajones•edited by: Donna Cosmato•updated: 10/12/2010

Not too long ago credit card companies reducing credit limits would have been the exception, but since the credit crisis it seems to have become the rule. Read on to find out why and how this practice can affect you.

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    What Prompted Credit Companies to Reduce Credit Limits?

    Reduced Credit Limit When credit card companies reducing credit limits becomes the norm, consumers can't help but raise their collective voices to ponder the reason behind the madness. It used to be that if you were late on your payments or generally delinquent in handling your account you could expect your credit card balance to get cut as a result, but even the worst credit card users may have previously escaped slashed access to credit.

    Some argue that it is precisely this relaxed attitude to credit worthiness that is to blame for the current drastic measures credit issuers are now taking to cut backs. The easy access to credit that was once the main driver of the finance industry's profits has ironically also become the main factor in its undoing. The entire credit industry has come under fire for granting lines of credit to those who were realistically unable to repay. This has forced a serious and widespread reaction from credit issuers, which has manifested in the reduction of credit limits on a cross section of clients. Of course, this action was not taken out of some overwhelming sense that something must be done to reverse the negative effects felt by millions across the US, but as a way to rethink the profit equation and make the credit business once again a vibrant industry.

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    Reduced Credit Limits and You

    Credit card companies are reducing credit limits in droves, which means that even if you are a shining example of perfect credit and your account has never been hit with a late fee or an over-the-limit charge, you may not be safe. Before new financial regulations came into effect in July 2010, several credit card companies were guilty of lowering limits to levels that were below the outstanding balance on the card and then unscrupulously slapping on an over-the-limit charge without prior notification to the client. Thanks to more stringent consumer protection laws that have been put in place the credit card company must give the account holder at least 45 days notice before reducing their limit, which can at least take the element of surprise away from the card issuer.

    Since many people run small businesses using credit cards as a way to fund working capital, a reduced credit limit can mean a severe cut on their short term financing, which in turn negatively affects profit levels and productivity. In addition to this harsh reality, credit rating agencies use a debt utilization ratio in their calculation of credit scores. A reduction in your credit limit can mean a dramatic rise in your debt utilization ratio because you appear to be using all or most of your available credit overnight. This can have a terrible effect on your credit score, which is a number that most people try to guard against all odds.

    Although you may no longer have much control over your credit limit, you can still manage your payments so that they are healthy. One of the few things you can do to fight back and protect your credit score is to make payments to keep your balances down.

    Image: Michelle Meiklejohn / FreeDigitalPhotos.net