There is no doubt that times are tough and people are relying more and more on their credit cards to make ends meet. After all, unemployment is at 10% and the Labor Department reports that 15.3 million Americans are out of work! Due to the tough economic times, credit card companies are getting worried! They’re afraid that people will continue to run up unpaid balances on cards. Credit card companies are now lowering the credit limits on credit cards. In other words, you may have had a $15,000 credit limit, but the credit card company might lower it to $13,000. If you have debt on a card and the company lowers your credit limit, your credit score will plummet. Here’s why:
You’ve always heard that credit card debt is bad for your credit score – but why? 30% of your credit score is what’s known as your debt-to-credit-limit ratio. What you owe (your debt or the total outstanding balances on all of your credit cards) over your available credit limits among all of the different credit cards (if you have more than one card!).
Let’s go back to the example above. You have 2 credit cards, Card A has a credit limit of $5,000 and Card B has a limit of $10,000 – therefore your total credit limit is $15,000. Let’s also say you owe $2,000 on Card A and $6,000 on Card B – therefore your total debt is $8,000. To find your debt-to-credit-limit ratio, compute $8,000÷$15,000, which is .533, or a 53% debt-to-credit-limit ratio.
What if the credit card company lowers the credit limit of Card B from $10,000 to $8,000? Assuming your debt stays the same (meaning you haven’t paid off any more debt), your debt-to-credit-limit ration is $8,000÷$13,000, which is .615, or a 61.5% debt-to-credit-limit ratio. Since the credit card company lowered the credit limit of one of your cards by $2,000, that caused your debt-to-credit-limit ratio to increase by a staggering 8.5%, which may not sound like a lot, but for your credit score, this increase is extremely impactful. Again, 30% of your credit score comes from this ratio – the lower the ratio the better! Again, if you have more debt, the increase in the ratio once your credit limit is lowered can be even higher. Remember, a lower credit limit will only negatively affect your credit score if you have debt (as illustrated in the scenario above).
Credit companies are not lowering the limits of everyone, but certainly to a countless number of customers. It is very disheartening to know that credit card companies are lowering credit limits, especially during these tough economic times. This is why HelpSaveMyDollars.com urges people to use cash only, but when you’re out of work, that may be tough to do!
What do you do if your credit limit is lowered? You don’t need to worry as much if you don’t have any outstanding debt – the only negative is now you have less to money to spend on your credit cards. Regardless, call the credit card company to see if there is any way they can restore the original credit limit back. If the credit card company refuses to raise your credit limit, try as best you can to pay off that outstanding debt.
Visit HelpSaveMyDollars.com’s Credit Card section for more information on paying off credit card debt.
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