Card Issuers Cut Limits, Lowering FICO Scores
In response to the inevitable credit crunch many credit card issuers are lowering credit limits without advanced warning to cardholders. In their defense, many borrowers have shown a propensity for maxing out credit limits with little promise of repayment. As a way of hedging against potential write-offs credit card companies have decided to minimize their exposure by reducing credit limits, and therefore the amounts available to charge.
How Does a Lender Lowering My Credit Limit Affect My FICO Score?
If you are like me and are not currently using your credit cards a credit line reduction may seem harmless. However, it does have an impact on your FICO score, not because the limit reduction is viewed as an adverse action, but because it raises your credit utilization ratio. The amount of your outstanding balances accounts for approximately 30% of your FICO score. The amount you owe as a percentage of your total credit limit is referred to as credit utilization. Run this figure above 30% and your FICO score will likely take a dive.
An example. Let’s assume John Q. Citizen has two credit cards and owes $4,000 on one with a $5,000 limit, and owes $1,000 on another with a $5,000 limit. On the first card, John’s high balance-to-limit ratio of 80% is bringing down his FICO score. The second card is well under the recommended 30% credit utilization ratio, at only 20%. However, the second credit card company has decided John Q. may be a risk because he just completely a car loan application, or he is shopping for insurance and has had a couple inquiries on his credit report, or because the lender doesn’t like guys named “John.” For whatever reason they choose, the credit card company decides to chop Mr. Citizen’s credit limit in half - down to $2,500. Without charging a dime, and arguably through no fault of his own, John is now suddenly running a 40% credit utilization ratio on his second credit card, lowering his FICO score even more.
My Credit Limit Has Been Decreased. What Are My Options?
- Call to Get Your Limit Reinstated. Call the customer service number listed on the back of your credit card. Explain your situation to the customer service representative and complete the identity verification process. Automatic credit limit reductions are typically performed as the result of a computer audit. Once a human being reviews the account and considers all the factors they may be able to restore your credit limit. If not, ask to speak to someone in the credit department, or a customer service supervisor. These individuals usually have a higher lending authority and may be able to override the customer service representative’s decision (which is likely still driven by a computer model).
- Transfer your balance to another card. If you have an open line on another credit card with a higher limit, and can transfer the balance without being assessed a fee, it might be worth the effort to move the balance over to the new card. This will improve your credit utilization ratio in the eyes of FICO. Be selective - surfing balances too many times could be yet another trigger for the infamous “universal default” or an automated credit limit reduction on your remaining credit card accounts.
- Do Nothing. This actually happened to me a while back on a credit card I only owed a few hundred dollars. I called the credit card company and they refused to reinstate my limit. I spoke with a supervisor who also refused, as did a representative in the credit department. None of the three could explain to me why the limit was reduced in the first place. My FICO score had not changed, my charging patterns had not changed (accept for the fact my charging was greatly reduced), and I wasn’t shopping for new credit. Regardless, they refused to budge so I paid off the account in short order. Against my desires to tell them to take a flying leap I decided to keep the account open as closing the account would reduce my total credit line and could potentially send my FICO score lower.
If you have had the card for more than a year and are more or less up to date, you can likely get it reinstated. When credit card companies drop the limits, they expect to reinstate a few that complain. Threaten to go to another company, they love that.
I just noticed my limit increased $1100. Not sure why, but I guess its a “good behavior” thing.
I look at people’s credit reports everyday at work and when I ask people what their score is, inevitability it is much smaller than they thought…after reading your piece, now I wonder
if some of their limits had been reduced. Thanks for the article.
This is a great post! I’ll be sure to watch my credit limits now!
Have you heard whether mortgage loans are harder to get because of the credit crunch? I’m (almost) in the market for a simple first-mortgage loan of under 100k, with 25% equity in the house. DO you think this will be hard to get because of all the recent troubles?
[...] for new credit. Regardless, they refused to budge so I paid off the account in short order. … credit : [...]
I’m sure most people probably do not know about the 30% credit utilization. I knew this, but had forgotten about it. Thanks for the re-fresher.
I have two cards, both of which are over 8 years old. One we owe nothing on, but have a $35,700 limit and the other, we owe $2,800 with a $16,500 limit. I’ve considered asking the limits to be lowered but didn’t want to risk hurting my FICO score.
We will probably keep both, but only use them for a few things each month and pay it off immediately.
My husband and I just experienced this- two different cards lowered the limits. Thank you for your explanation of FICO- it is always good to hear it again. We like to keep our card limits low anyway because it keeps us honest
Credit cards seem like a liability sometimes.
I just started subscribing and I really look forward to your posts.
That’s a great idea, one worthy of experimenting with. I’d like to suggest it to my wife but I think she may not speak to me for a while. Great photo as well! We’ve been doing pretty well. Managed to get a loan to cut up a couple of cards. Looks like we will break through out debt in about 4 years! Sounds long but at least we can see some light in the distance.
Bruce from The Bookshop Blog
[...] We may have to follow Jeff’s lead pretty soon. Jason from Frugal Dad uncovered a way that credit card companies can lower your FICO score, even if you do nothing wrong. All the more reason to ditch those [...]
[...] Card Issuers Cut Limits, Lowering FICO Scores at Frugal Dad. [...]
There have definitely been some BIG CHANGES in the credit card industry due to the “credit crunch”. Of course, some issuers are worse than others when it comes to unexpected credit limit decreases. We’d love to get your feedback. We recently started a poll on the Best & Worst Credit Card Issuers. Feel free to stop by and give us your opinion
I opened a business in the summer of 2007, like most start up businesses; I had to rely on credit cards to get me started. I took cash advances and took advantage of 0% interest for 18 months. The problems started a few months ago, when AMEX was first to lower my line of credit. Sure it didn’t look good to owe $20,000.00 on a line of credit of 60k, but I figured I would have that paid off in approx. 1 year and in turn that would raise my credit score back up. After all, I would be making so much money that I would no longer need to use credit cards, right?
(WRONG!!)
Wow, where do I begin? The economy did a nose dive, ok life is still good, I stop making large payments, but continue to make my minimum payment due, approx. 10 days BEFORE the due date, they can’t criticize you as long as you make your minimum dues, right?
(WRONG again!)
AMEX was the first to lower my line of credit down to $20,500.00 that in turn made me look like I was dangerously close to my credit limit. (Remember I owe them 20k on what used to be a 60k LOC)
If you haven’t guessed it already, my CITIBANK was soon to follow. They chopped my line of credit down to $200.00 over what I owed. I continue to make on time payments, not charging any more, paying when the bill comes in, only to be rewarded with a notice that my line of credit has been lowered because of the “high utilization of credit”. Approx every other month I pay off another $1,000.00 to be greeted by a “congratulations on paying us another thousand, but due to your high utilization of credit, we are lowering your lines even further,” letter.
All my creditors have, lowered my lines of credit and raised my interest rate. There is no end in sight, my credit score now is in the low 500’s with a debt ratio of 98%, I owe approx. $130k in credit card debt that I make the min. payments of approx. $5,000.00 per month. I went from a successful business man to a chump living week to week. Owing $130k used to pale against $800k in credit lines. Now, with $130,200.00 in open credit lines, against $130k of debt, I am a has been, wash up.
I went to my local bank to see if I could get a low interest loan to pay off the credit cards……. they laughed at me saying that I owe to much money. The problem is that they are looking at my personal income instead of my business income……… round and round we go.
I received a notice today that Sam’s club is dropping my credit line to 1/32 of what it used to be. I was so angered, that I closed the account. Probably not the wisest thing to do, but I was SO pissed and it made me feel good to tell them that I didn’t need their card.
I am a red blooded American working to support my family. I opened a business to realize the American dream. I run a successful business that is actually doing well considering the economy. I didn’t think it would take this long to pay down the debt, but it has. I have never missed a payment, yet all my credit card companies have lowered my lines of credit and raised my interest rates. (Which in turn have lowered my credit score, now potential new suppliers don’t want to talk to me.)
I am not eligible for a lower interest loan and the credit card payments are just too high. I am for once in my life considering bankruptcy, it seems like the credit card companies just don’t give a shit. This whole circle would not have started had they not started to lower my credit lines. Is there any legal recourse? Can I sue AMEX for defamation of character? (Even the Nigerian scam emails have stopped for me, that is very sad.)
The only thing I HAVEN’T done is stop making payments.
If there is a high ranking bank executive out there reading this, please explain to me how to get out of this mess. I may be wrong, but if I could some how qualify for a low interest business loan to move the money owed off my personal credit to the business credit, I think my personal credit score would go up again to qualify for the loan in the first place. I am an honest man, I am not looking to move the money, for no matter who I owe the money to, I still owe the money. I would be interested in lowering my monthly outgoing expenses.
Thank you for your time for reading this, to voice my frustration at the credit card companies.