Watch Out For Credit Limit Cuts

Heads up, credit-card holders.

Card issuers facing economic pressures are decreasing people’s credit limits, at times without telling them, a national consumer group warned.

If it happens to you, it could be embarrassing when you pull out your plastic to make a purchase and get rejected.

It also can result in over-limit fees of as much as $36 a pop if you unwittingly charge more than the new limit—which in turn can trigger interest-rate hikes from all of your credit-card companies.

Dropping people’s limit has other implications. It reduces the amount between their balance and how much they’re allowed to charge, so they appear riskier, maybe even in danger of defaulting. And that’s when credit agencies lower people’s credit score.

A lower score means the cardholder will pay more for everything they buy on credit and might even miss out on job opportunities because employers run credit checks.

In its credit limit survey conducted this summer, Consumer Action said it asked 1,083 consumers nationwide if they ever experienced an unexpected reduction in their credit-card limits.

The California-based national organization reported that:

Nearly 18 percent said their credit limits had been lowered by card issuers.

Half of those said they had seen their credit lines drop this year.

Consumer Action Deputy Director Ruth Susswein said, “We are not happy to see that almost a fifth of card holders are learning that their limit is lowered, sometimes without them knowing. It’s a problem.“

Carol Kaplan, spokeswoman for the American Bankers Association in Washington, confirmed that “generally speaking, many banks are lowering credit limits and tightening lending standards across many lines of business.“

How much a person’s limit is lowered “would be different in every case,“ she said.

Issuers lower limits when the economy is good, too, Kaplan added, but only in rare cases.

Susswein said some credit-card issuers warn consumers when they’re going to lower their limit. But “they don’t always, and they don’t have to.“

Issuers regularly review the credit scores of account holders to assess their financial risk. If they become afraid that consumers won’t pay their debts, they will lower their credit limit.

“I would attribute it to card issuers attempting to manage risk better,“ Susswein said. “If they are truly a riskier customer, then limiting how much deeper in debt they can get can be valuable to the cardholder as well as the credit-card issuers.“

In its newest credit-card survey released last week, Consumer’s Union, publisher of Consumer Reports, said some banks are doubling and tripling card interest rates and lowering credit limits—in order to make up for slacking profits, one analyst said.

Other findings from the Consumer Action study:
# 48.6 percent of respondents said they’ve experienced interest rate increases.
# 42 percent said they were curtailing credit card use during this difficult economic environment.
# 34.2 percent have been charged an over-limit fee.

Susswein and Consumer Reports offered the following tips to avert the woes that a dropped credit limit can cause:
# Call your credit card company and confirm your credit limit. Do it before making a sizable purchase on your card.
# Monitor your credit report and score. Get your free report at annualcreditreport.com. The score costs money.
# Don’t charge more than 50 percent of your available credit.
# Don’t pay late. Try paying a week early.
# Open your mail. Your notice about a credit limit decrease may be inside. You may be allowed to stop using the card and pay off the existing balance under your old rate and terms.

Do these things and “you’ll better your chances of not seeing your limit drop or your rate increase,“ Susswein said.

Iris Taylor is a staff writer at the Richmond Times-Dispatch.