Credit Card Limit Reductions: What Are The Rules?

There are no rules that stipulate why or what reasoning is used to lower consumers credit limits on their credit card accounts. Normally, the consumer has had to do something to prompt a negative action from their credit card company, but now the only reason seems to be that you have to be a credit card holder with a balance.

Many consumers when receiving their monthly statement are finding that their credit limit has been decreased or interest rate has been raised without their knowledge. However, what is true and understandable by most consumers is that any changes in their credit card terms is also a change in their credit score which affects how they can obtain credit in the future.

Most consumers are asking how credit card issuers are making the decision to lower their credit limits especially if their credit score is over 720 and above, they make their payments on time each month, they don't go over their credit limit and they have no negative information on their credit report. The easy answer is it's because of the current economic situation. However, there are other factors that will affect your credit limits also.

Every account has a statistical value based on usage. Credit card accounts that are paid in full or rarely used are of no value to a credit card company. There simply is no money in it for the company because there is no interest, no annual fee and most importantly these consumers are disciplined to a point that they are able to avoid the negative fees associated with credit cards if the consumer doesn't follow the financial rules.

A second factor is risk quotient. Credit card issuers consider whether it is likely a customer will leave a balance that will ultimately result in a charge-off, have late payments or going over their credit limit. Remember, financial institutions pay credit reporting agencies for your financial information. If a credit card issuer sees where you have defaulted on another credit card account, the issuer gets nervous and in an effort to protect their financial interests will take the appropriate action to decrease their risk.

You don't use enough of your credit line. Credit card issuers will review your spending pattern and reduce your credit limits accordingly. If you haven't used your credit card in say two years, that's another red flag for your credit card company. It can result in your credit limit being reduced or your credit card account closed. However, keep in mind if your account is closed, you don't lose your credit history with the card issuer.

We will respond to the current economic challenges and make appropriate adjustments to cardholders' accounts. Credit card issuers review their customers' credit limits in an effort to sensibly manage their risk. Consumers typically carry less credit card debt than mortgage debt, but credit card debt is often more penalizing because issuers have a considerable flexibility to change the credit terms at any time.

Granted, interest rate increases and dramatic reductions in credit limits can send consumers deeper into financial stress, rather than encouraging them to pay their bills. Credit card companies are focusing on reducing their risk, which means they will be reducing limits for customers that fit a certain criteria. If you pay on time and are never late, you may still be considered a risk. Now, card issuers are reviewing your payment habits, credit score, and even where you shop to determine how risky you are to them. Remember, in this economy, the banks definition of risk is changing or has changed.

According to the American Bankers Association (ABA), credit card issuers are decreasing consumer credit lines by more than 50%. When this occurs, it can impact your credit score. For more information on credit, visit my credit blog at:
http://www.j6financialsolutions.com/creditmatters.htm.