You may want to think again. A CNBC report suggests that your next credit card statement could hold an unwelcome surprise – a lower credit limit.
As banks look for ways to protect themselves from risk, people across the U.S. are finding that lenders are reducing their credit lines and cancelling rarely used cards.
Bank of America spokesperson Betty Riess explained that financial institutions have always exercised their ability to raise or lower credit limits as and when they see fit. However, she said that the credit crunch has made them more likely to enact changes.
“We’re working more aggressively to control risk,” she said.
To assess whether your own credit limit is likely to be affected, take a look at your borrowing history. Credit card companies consider a variety of factors – including debt, payment history, income, the existence of subprime loans and housing values – when making their decisions.
And remember that your adjustments to your credit limit do not just affect your ability to make big purchases. They also impact your credit score.
This is because your score, in part, is determined based on the ratio between your available credit and your debt. For example, if you have a total credit limit of $6,000 and a balance of $1,500, you may be considered to have a fairly good ratio. But if your limit is lowered to $2,000 and still maintain a $1,500 balance, the move could end up hurting your score.
So, the threat of a weakened credit score could be a wake-up call to get your finances in order. Start by paying off any debts you can and avoid adding any unnecessary purchases to your revolving balance. Also remember that paying as much as you can towards your monthly bill will help minimize the overall amount of interest paid.
In the end, some claim that banks’ decisions just reflect fair play. Bauer College of Business finance professor Ron Singer told Fox 26 News that it makes sense for financial institutions to expect some consumer belt-tightening when they themselves are cutting back.
“By reducing credit limits and reducing the offerings of cards, banks are really telling consumers you’d better be more careful about spending your money,” he explained.
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