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Category:  Money

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What to do if a Credit Card Issuer Cuts your Credit Limit

You have alternatives to regain your limit -- and a higher credit score

By Dana Dratch

Normally, when a consumer has a problem with a credit card company, the solution is simple: Find a new card and walk. But when the credit limit drops, the credit score may take a hit. So it can be  more difficult for cardholders to take their business elsewhere.

It could "have the effect of keeping you captive," says Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group. "If you have a lower credit score, you're less likely to be recruited by competitors with better terms."

But there are a few strategies that may mitigate the damage to your score:

Fight back. Call the card company and try to negotiate a higher credit limit. Reference your spotless payment history, and your (formerly) healthy ratio of available credit to debt. Use all the usual tricks: Ask for a supervisor, and work your way up the ladder. While it won't always work, it's worth trying.

Pay down the balance. If your credit score drops as a result of this move by the card company, that's largely because the scoring formula calculates that you're using too high a percentage of your available credit (even if it's the same dollar amount you've been shouldering for years). So if you lower the balance, you lower that percentage (if the company doesn't decrease it again), and you'll raise your score. Smartest move: Wipe it to $0, and use the card only infrequently for small items only to keep it active.

Call your other cards and request a limit increase. Like explosives, you have to handle this strategy carefully. If it backfires, it can cause some damage.

You need to know that if the card bank does a "soft inquiry" (doesn't pull a new copy of your credit report), it won't affect your score. If card bank does send for a copy of your report, that "hard inquiry" could lower your score for up to one year.

Rule of thumb: If you can log onto the card site and press a button to request a limit increase, that's usually a "soft" (nondamaging) inquiry, says Joe Ridout, spokesman for Consumer Action. But if you have to give any information, such as your Social Security number or employment information, that's going to ding your credit -- it's a "hard" inquiry. If you request an increase by phone, apply the same litmus test. And ask about hard and soft inquiries.

Open a new account. Again, this tactic isn't for everyone. Your score still has to be fairly decent. (You may need to move quickly.) And there will be some short term damage to your score as a result of the inquiry and new line of available credit. "A year from now, the inquiry will have no effect, whereas the higher limit will help you," says Barry Paperno, manager of consumer operations for Fair Isaac Corp.

But consider carefully. "For a lot of us, it would open the door for more spending," says Ridout.

Don't cancel the old card. Even if you never use it, that unused available credit will help your credit score. "I paid the balance but left the account open," says Orange County, Calif., resident James O'Neill. "If I ever need it, it's there."



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