Imagine owing $360 on a credit card with an $8,600 limit, only to have the limit cut to $300 and then be assessed a $35 over-the-limit fee. That’s what happened to Paul Pensabene of Saratoga Springs, N.Y., according to this article from SmartMoney.com. Thankfully for Paul he was able to get the fee waived and pay off the balance, but it is a scary reminder of how far credit card issuers are willing to go to purge themselves of excess risk.
Credit limit cuts and even account closures are becoming more common as issuers try to limit potential exposure to defaults. I’ve had one of my unused Chase accounts cancelled for inactivity, and a Citi account reduced from a credit limit of $5,000 to $500. But in addition to just being an aggrevation and the potential for fees as indicated in the noted example, these moves can have a big impact on your credit score. As noted in the article:
While the fees, frozen accounts and default interest rates resulting from credit-line cuts can sting your finances, they can do some serious long-term damage to your credit score. Your credit utilization ratio — the total amount of debt you owe in relation to the amount of credit available to you — accounts for roughly 30% of your score. A credit line cut has the potential to decrease your score by 50 points or more if you don’t have much other available credit, says Craig Watts, spokesman for FICO, the company that calculates and issues the credit score that most lenders use.
What can you do about it? The easiest answer is to try and call the issuer taking the action against your account and request the credit limit or account terms be reinstated and any assessed fees waived. Another option is to open a new account with a different issuer to increase your available credit and decrease your credit score’s dependence on a single issuer, although this is a lot tougher now than it was a year ago. The other thing to do is to be sure to use all of your open accounts for purchases so they don’t get shut down for inactivity.
